On Tuesday, April 23 the markets plunged after the Associated
Press twitter account was hacked and published a tweet that two
bombs had exploded in the White House and Barack Obama was
injured. The Dow Jones Industrial average plunged 150 points in
only a few seconds, but quickly recovered.

What was action was swift, as traders quickly sold stocks and then bought them right back ... making the clear cut winners the brokerages that generated a few more commission dollars.

The losers are even easier to find. They are going to be the small time investors. Mom and Pop. How did they lose out? Well they are more likely to use stops and while they agreed to sell the stock or ETF if it went below a certain price, they lost out. This is probably the most important lesson regarding stops since the big flash crash of May 6, 2010.

Maybe Not So Much

I know it’s hard to really say they were the same thing, and the damage of the real flash crash was so much more than the Twitter hack job. But there are lessons that can be learned here and the use of stops as a "hedge" is the number one lesson.

If you want to hedge a long position you hold, you need to use options. They are complicated, but a broker can walk you through a solid strategy on how to protect yourself without being exposed to the flash crash that will come again in the future.

In the big event, holders of Apple (AAPL) got smoked if they put a stock in far out of the market. This time, the damage didn't take as big a bite out of the big red fruit. The four point drop in AAPL the other day doesn't compare to the 50 point drop of the flash crash, but it’s a drop nonetheless.

Twitter Is The New Tape

If there was any doubt about it in the past, we can put the idea of traders not being on Twitter to rest. The source of the rumor was Twitter and the traders acted after the tweet came out. In a shoot first, ask questions later world the traders went for the kill and some got killed.

Twitter is becoming the source that investors look to first for the dissemination of news. Breaking news is like heroin for traders and the source that is the fastest is the best. For most, that means a twitter account with multiple lists of news providers and other resources.

Conference Call Questions Via Twitter

The adoption of Twitter is nearly complete. Late last night I learned that Zillow (Z) would be taking questions for management on the earnings conference call via Twitter. Talk about being ahead of the curve and leading the market! A move like this is bound to only bring more attention to the real estate information resource.

It seems like it will only be a matter of time before all companies are using Twitter to take questions.

The take away from this idea is that Twitter is not going away. It is only going to expand from here. Expect Wall Street to continue to rely on it.

In God We Trust, All Others Not So Much

The final and most import lesson from this investment idea is that Twitter can be hacked. Lies can be told. Misinformation can abound.

You knew that already, but the idea is that you have to be responsible for yourself and do your own homework. Sure you can follow the Penny Stock King and make the big money he or she promises, but you can also lose the big money just the same.

Verification on Twitter may tell you that the account of @BillClinton is really the former president... but he just joined last night and all the other Bill Clinton's on there were fake. I mean all but the one account that Stephen Colbert created for the former President.

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Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout GrowthTrader a trading service that focuses on small cap stocks and also carries a risk limiting strategy.

Follow Brian Bolan on twitter at @BBolan1

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Original: http://www.zacks.com/commentary/26968/lessons-from-the-twitter-crash
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Posted: April 25, 2013, 4:18 am