Humans, in general, are uncomfortable with uncertainty. Instead of accepting the fact that we don’t know everything, we’d rather be spoon-fed an explanation (whether it makes sense or not).
And if you follow the stock market… you’ll see it every day. One day the market takes off because the economy looks strong… the next it sells off due to fears of the coronavirus spreading…
But the global markets are complex, there are several moving pieces at work… do you really think we can sum up the reasons why it moves the way it does?
It almost feels like the narrative is written after the fact…
That’s why today’s lesson is so important.
I want to explain to you how to tell the difference between real news and fake. It’s not as easy as you might think.
There’s a lot of noise you must sift through in order to find the truth.
That’s not to say that news events don’t drive the market. Michael Bloomberg made billions delivering timely information to traders and investors.
He knew what was tradeable news and what was garbage. And if you can’t tell the difference, it’s costing you a lot of money!
First things first, let’s start off by categorizing the types of news.
Not all news is created equal. Some stories have lasting impacts, while others just stir the pot. I look at news in a few different segments.
Data – This includes Fed policy decisions, labor statistics, or any other measures that help us get a picture of what’s going on in an industry or the economy. Data points themselves don’t do much. Instead, analysts look at trends, which occur over longer periods.
Earnings (or other company announcements) – These are company-specific. However, some companies may give outlooks or commentary that looks at a bigger segment of the market.
Emotional – I lump in things like Trump tweets, Fed commentary, or anything that doesn’t contain much substance, but drives emotional decisions of investors.
Black swans – These unexpected events happen from time to time and throw the market for a loop. Coronavirus would be a good example, as well as the temporary Iran/U.S. conflict last year. Sometimes, they’re catastrophic like 9/11.
You would think that the ‘hard’ information from data and earnings would drive stock price movement immediately. Most of us don’t realize how long it actually takes to work. We see the reactions to earnings announcements and think that the two are tied together. In fact, most investors take weeks to digest and parse through the release.
The same thing goes with data. Outside of complete surprises, one data point won’t change investors’ minds. It takes months or longer before the boat finally turns.
Could one man prop up the market?
In 2016, markets were in freefall during early February. During one of the drops, Morgan Stanley CEO and Chairman Jaimie Dimon came out and bought a whole bunch of stock. Pundits were quick to point out that this news ‘bottomed’ the market….except the market bottomed several minutes before that news first hit the wire anywhere.
Now, you could argue that someone had insider information. I would buy that. But let’s bet clear about something – Jaimie Dimon buying stock in his company didn’t stop the multi-week decline. It doesn’t work like that.
Newsworthy events like a Trump tweet or a Jaimie Dimon bottom only create impacts intraday. Rarely do they cover anything so expansive that it changes the way people think about investing. However, it certainly can influence intraday action.
In fact, most pieces of news will create some temporary impact intraday. Whether it lasts any longer is a function of two things.
First, the timing of the news in relation to the market. Jaimie Dimon’s call may have served as a catalyst for the market to bottom. But, it also occurred in a very oversold market that likely was getting ready to turn. If he made that same announcement after a rally, it probably wouldn’t have had the same impact.
Second, whether it actually changes anything. Initially, President Trump’s tweets could agitate the market by creating uncertainty. Now, traders look past it until they see any actions take place.
The taper tantrum is a perfect example of real news that’s masked in emotions. When Ben Bernanke hinted that easy money might be going away, markets took it very badly. The same thing happened when the Fed raised rates in December 2018. On the flip side, markets rallied on interest-rate cuts.
Which news matters
News that presents new data or new ideas will have a longer impact directly tied to that news. However, both nonsensical news and hard news can swivel the market intraday. That can create a cascading effect that drives long-term change.
You won’t know ahead of time how it all plays out. But, hard news has a higher probability of creating a lasting impact.
As traders, we need to be aware of both. That means creating a calendar of important data releases and thinking about how that impacts different stocks and markets. A great place to start is my weekly Jump on the Week newsletter. I point out the key data releases, earnings, as well as potential market-moving events.
In fact, I combine that information with chart analysis to deliver my Bullseye Trade of the week. How else do you think I could come up with one trade that has my highest conviction for the upcoming week?