Monday, June 15, 2009

Trade the News? I Don't Think So

When I did my column this morning, hospital, nursing and home services stocks were in the pooper. My editor rightly wanted to make mention to Pres Obama's speech on cutting costs since it was germane to the sector.

Considering that I write a technical column, it really was irrelevant. However, we must operate in the real world and not making mention would risk readers thinking we are out of touch. I liked how he added the text for me.

Anyway, in our email exchange I wrote the following:

"You are right - a mention is very appropriate. But it was not the cause (of today's carnage in the sector).

I mentioned (in the column) that the sector peaked June 2 and now ask a serious question - was Obama's speech known at that time? Was there something out there for the public about what would be in the speech?

What I am trying to say is that the sector started to fall two weeks ago. Today's news may have triggered a little panic selling (I do check the news on each stock but there was nothing about the speech) but unless there was something known two weeks ago it was not the cause."

This is a mistake many investors make - thinking that the news drives the stock market. The stock market anticipates the news. Somebody always knows something before anyone else. Someone always reads the tea leaves (and I am not talking about the charts). They act and their footprints are visible in the market for technically oriented Columbos to find and then act in turn.

Don't believe me? Put this in your bong and smoke it:

Why did the stock market peak in October 2007. The fundamentals looked great. Bears Stearns was still in business. Subprime had not exploded. There was not such thing as TARP and Bernie Madoff was just the guy who owned the market maker that kept screwing me on executions.

In short, the world was still in terrific shape - yet stocks started to fall.

The news causes wiggles but the market peaks and troughs before the public gets its firts whiff of the news that matters.

5 comments:

bmbull said...

True -- but don't forget that by October '07 the credit markets had already started to come unglued... So there was a lot of 'news' that was already out -- for those that were paying attention.

Quick Takes Pro said...

Quote me on this one:

How many bear markets started when the fundamentals looked great?

Answer - all of them

True, somebody had to start selling because they saw something coming but the public - the masses - was happier than Dr. Phil (or Dan Rather) making country comparisons.

The fundamentals on March 6 looked so bad the words "financial Armageddon" were used. The bull market started right there, even though we remain in the giant trading range - see 1974.

Jason said...
This comment has been removed by the author.
Jason said...

I found google news search to be an interesting tool for sniffing trends like that. The first relevant mention of "financial Armageddon" was mentioned after March '07 drop, right before Blackstone went public. The mention of the phrase peaked in August '07 and I guess people decided that it was just heresy and forget about it for another until around the big drop of '08.

http://news.google.com/archivesearch?q=financial+Armageddon&scoring=t&hl=en&ned=us&sa=N&sugg=d&as_ldate=2008&as_hdate=2009&lnav=hist14

D TradeIdeas said...

Refreshing insight on the staleness of news. There is, however, a mine field of opportunity in analyzing and tagging all news. Services like the failed Monitor110 and currently Psyng seek patterns in keywords mentioned across all sources as well as who is speaking and from which source its coming.

The bottom line is information gathered from a speaker's notes at a exclusive conference or a researcher's white paper holds more value for seeking out a trend if found in a timely manner than when the same trend finally gets explained on the local 5pm FOX news channel.

I stick to what the technicals tell me in real-time and to what patterns are in motion. For the reasons you point out services like Briefing and NeedtoKnowNews use my real-time service to add color to their news information services - often describing a spike/wiggle in volume or price in advance of the news that generated it.