How to trade the news!
“This is an excerpt from the Liberated Stock Trader Book and accompanying Training Course.”
We have all been there. Have you bought a stock you 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, they paid.
The bill, of course, was the earnings report. The 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.
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 the release of the earnings, the company decided to issue more new stock to the market, the stock price had quadrupled in the previous four months to over $2, and the future was rosy, yet the delay in news hurt. When this charlatan of a company decided to issue extra stock to raise capital for one of its new megaprojects, 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.
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, mere mortals might not have these advantages. There are also 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 the 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 you should not believe everything you read. The fact is if we take news with a pinch of salt and make our own minds up about its real meaning, it can be useful. But too much news can drag you in with the sheep on the road to the slaughterhouse.
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 rooftops that the American auto industry was dead, you should have been watching Ford for a rebound.
This section of the training course gave you an overview of the stock markets, their size, and their growth. We also covered the boom and bust and cycles. We even took a look at how to build a successful trading plan and how to trade the news.