Chapter 11 – How to trade the News!By
“This is an excerpt from the Liberated Stock Trader Book and accompanying Training Course“.
We have all been there, I certainly have. I bought a stock I really thought was a winner, like the perfect first date, it looked good, it felt good, it sounded good, it smelled right, and most of all it acted right. Even when it came to paying the bill, she paid.
The bill of course was the earnings report. Earnings were great, the chart looked good, the fundamentals looked great, it had an order book of new contracts in a booming economy, an industry leader delivering a good service. Yet when the excellent earnings were reported, beating estimates no less; the stock plummeted by 50% in one day.
I guess my free news sources including Routers and other sources saw me as the last drop off point for their baggage. Did you know that unless you pay for the premium services offered by Bloomberg and Reuters you receive the news with a 30 minute delay? The playing field is not quite level. That is why you pay the premium price.
On release of the earnings the company decided to issue more new stock to the market, the stock price had quadrupled in the previous 4 months to over $2 and the future was rosy, yet my delay in news hurt me. When this charlatan of a company decided to issue extra stock to raise capital for one of its new mega projects it issued them at 50% of the value of the stock available on the market. This immediately involved carnage to the stock price. In fact the price although eventually recovering, has again slumped to under $1.
I was not playing the news, the news played me. However there are those that play the news with some success. The problem with playing the news is it is not hard and cold facts it is feelings, interpretation and an abstract appreciation for how the public interprets news events.
How often does it happen that when a good earnings report is announced the stock falls? Too often! Why? There is a saying on Wall Street that you “buy the rumor sell the news”. That’s great if you mingle in the rumor circles that might pay, insiders, employees, good buddies with the CEO. However for us mere mortals we might not have these advantages. I have also heard of too many rumors that have backfired, tips from a friend in the industry, the nod from the supplier to a new startup company with a bright future. Apart from being illegal, insider trading of this nature especially when second hand is completely unreliable.
But to some extent we all play the news. One way or another it gets us. Turn on any news channels and the reporters are constantly overstating the meaning of things. We should not believe everything we read. One of my favorite headlines was from USA Today.
Honestly, can you believe that!
Of course economists can rationalize anything, but I am not buying it. The fact is if we take news with a pinch of salt and make our own minds up about it’s real meaning it can be useful. But too much news can drag you in with the sheep on the road to the slaughter house.
Trading the news can be very difficult this is why there is such a strong emphasis on Fundamentals and Technical Analysis.
News is completely open to interpretation; this is why I detest news corporations that force their opinions on the viewer or readership. Viewing news with a contrarian attitude or making your own decisions on what that news really means is absolutely critical. When everyone was yelling from the roof tops that the American Auto industry was dead I was watching GM like a hawk, it was in every news medium, I had no choice. However if I had bet on Ford (whose products I prefer), I would have made a killing in 2009.
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Other Chapters of the book are here