Apr

17

 There are some traders who make money based on news events. Please tell me how an analysis of the recent news could have been beneficial to traders who analyze news. The first reaction was a drop of 1 % in the last hour in S&P and a rise of a corresponding amount in gold. The reaction overnight was the opposite. Why was this news so bullish overnight? Is all news just an opportunity to do the opposite of the initial reaction? What do you think? Is there a systematic way to profit from news announcements? The 9-11 was not a temporary thing. Was that the clue?

Steve Ellison writes: 

I would hypothesize that any market reaction to a news event that triggers strong emotions should be faded because of the availability heuristic (people tend to give too much weight to dramatic but rare events).

I would also hypothesize that any market reaction to government statistics should be faded, since they have margins of error and are often significantly revised later. However, when I tested this proposition using the government report that routinely provokes strong market reactions, the monthly US unemployment report, it was not clear there was any edge to trading in the opposite direction of the S&P 500's move on the report day.

Jeff Watson writes: 

I generally don't fade USDA crop reports after they come out and grains are offered limit down. However, I've been known to buy wheat right at the top just before the report and have it go limit down on me. I hate that feeling as the noose tightens when the trapdoor opens. In fact that just happened to me on the last go-around.

Alston Mabry writes:

How do you test news events? First, you have to immediately and accurately evaluate what effect the event "should" have, ex ante. And then at some future point in time, compare the predicted to the actual effect the event "did" have, ex post. As there is no objective measure to use for the first step, you wind up simply testing whether or not you're any good at predicting the effects ex ante.

Steve Ellison writes: 

I tested using the following logic. If the absolute value of the change from Thursday's close to Friday's close on an unemployment reporting day was greater than the median of the absolute value of the daily change in the previous month, I assumed the market was reacting to the unemployment report and selected that day. For all the selected days, I backtested a one day trade entering at Friday's close and exiting at the next trading day's close, positioned in the opposite direction as Friday's net change. That is, if the net change on Friday was positive, the hypothetical trade was a short. The results were consistent with randomness.

Sushil Kedia writes: 

News is a rare commodity in today's world. We are inundated with broadcasts today. Any media missives that bring by a communication of fact and those amongst the fact-set that are beyond the expected may still have some market moving value. The durability of that fact or how out of line of anticipations it was may perhaps have some effect on how much and for how long the prevailing state of prices will be affected. Those broadcasts that provoke emotion are likely that are worth inspecting a fading trade. Whether news of war, crop-failures or any such genre' of information flows that produce an instant or moment of endocrinal rush.

The fine art of speculations rests on anticipations. Broadcasting media would never report what is coming to happen tomorrow, but only what may have (no guarantee that the broadcast is totally factual, since we have more "viewspapers" today than newspapers) already happened. Those who rely more on figuring out what they ought to anticipate on such resources are often the food for those who would rely on these broadcasts to figure out where the likely dead bodies will be buried. Price may not have all the information of what keeps happening every moment, but does have more information than any other resources of what is expected to happen.

Event Study Method may be a decent tool to evaluate the statistical behaviour of specific kind of events that occur repetitively with varying outcomes and of studying the repetitive actions of specific mouth-pieces than of studying erratic and randomly occurring news.

In a highly inter-connected markets' world and where the risk-free rate itself has a volatility the comforts of isolating non-random abnormal returns' evidence too is fraught with risks of playing on a frail advantage that keeps fluctuating in its expected value with ever-changing cycles if not fading away. Thus, it seems fair to me rather than an over-simplification that the most important factor for the next price is the price at this instant or any distant instant is the price at this moment and in the prior moments.

Rocky Humbert writes: 

I have one secret on this subject that I will share. Well, actually it was explained by Soros and Druck as the "Busted Thesis Rule." I think I've written about this previously on the Dailyspec.

If there is a news event that SHOULD BE unequivocal in it's meaning (i.e. bullish or bearish), and the market after a bit of time starts going in the opposite direction to the consensus meaning, then it's a wonderful opportunity to throw your beliefs out the window and go with the short-term direction. Many important big moves start this way. For example, XYZ is bullish news, yet the market after a little pop starts going down, down, down, …. don't fight it. Rather, "Sell Mortimer Sell!" P.S. I learned this lesson the hard way when Bell Atlantic made its ultimately ill-fated bid for TCOMA and Bell Atlantic's stock when straight up instead of what it "should" have done … which was go straight down. I won't describe the censure I received by my legendary boss at the time. Amusingly, neither of these companies still exist. Bell Atlantic became Nynex which became Verizon. And if memory serves me, TCOMA was bought by AT&T when they got into the cable tv business…

Gary Rogan writes: 

In a similar type of episode, when 3Com spun off 5% of Palm thus giving it a market valuation, and the resultant value of Palm significantly exceeded the value of 3Com that still owned 95% of Palm, this marked the end of the dotcom era.


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2 Comments so far

  1. bo keely on April 18, 2013 6:37 am

    must predict if the news event was random or planned. if former then look to the past history of crowd/market reaction to similar events. if planned, like 911, and probably the boston marathon bombing, then anticipate the source and why he planted the news. the blast occurred four odd hours into the race when the stragglers crossed. lot of smoke directly in front of the tv camera. two bombs in case the first foiled.both on timers. the thug flew in from the west coast the prior night, and on arriving left a message from a remotely activated phone on the west coast that was picked up on the west coast by his ‘mark’. this established an alibi for he was across the country. he set the bomb in basket w/ a timer that ticked as he flew back west. he went into a crowded sports bar five minutes before the explosion that guaranteed him the target publicity and hence a deal w/ the ‘mark’.

  2. David on April 22, 2013 11:40 am

    At my old firm, one guy traded news by fading each news story that gets resurrected in some slightly different way. For example, back when the BP spill was the big story, there would be constant updates on how capping was going, how big the sheen was, flow rate, oil balls, etc. but it was being released by different sources at different times. An example of how it worked was let’s say BP and JOE gapped down 5%+ on news of oil balls coming to Florida’s panhandle. Then in the afternoon or next day, there would be another news source saying basically the exact same thing. When that news story came out, there would be a quick low-volume selloff into a refreshing bid that usually marked a temporary bottom. He would bid with the others then march his bid up as the weak shorts pennied each other on the bid trying to get out.

    He also traded on rumors and chatter that didn’t make any sense but would come across places that are monitored by daytraders.

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