Stockfessor

#55 Making Use Of The News — Stock Trading Analysis

News serves many purposes, most importantly, to inform the public. When you examine how news is generated and presented in the real world, you begin to doubt how much truth we get from the news everyday. Here are some of my observations about news:
•    Created out of nothing, which we call rumor.
•    Created to sell a product, which we call advertising or peddling.
•    Created to please, which we call entertainment.
•    Used as propaganda by politicians or talk show hosts.
•    Interpreted in another fashion far from truth.
•    Released at a convenient time to serve a purpose.
•    Controlled by the state or an authority.
•    Coming from a single source with no competition.

Considering the above, you should not take the news for its face value. You must read between the lines and distill out the truth. Above all, you should never follow the news blindly.

The stock market is full of news that you have to be careful about. How can you tell the true from the untrue? How can you discern which one has major consequences? How can you tell if it affects the stocks you hold? In other words, how can you make use of the news?

Out of Date
News is about what has happened. The stock market is always looking ahead several months based on expectations. It should not surprise you that most of the news is out of date for the stock market. The news is only good for providing you with the data about the past so that you can form a reasonable expectation about the future. You must not buy or sell according to the news without further thinking. For instance, you buy a company stock because they have just announced record profits for the latest quarter. But beware, what if this is the last record profit preceding a downturn?

Misleading or Misrepresented News
News is subject to interpretation with all kinds of personal bias. You find misleading or misrepresented news in the stock market everyday. Why? Due to so much money involved, people will manipulate the news to achieve their own objectives. First, stock prices have to move. Else, nobody will make any profit. Second, the public has to be seduced to participate. Else, the big players will cannibalize themselves rather than feeding on the small guys. What is a better tool for seducing the public than making news coupled with experts’ analyses?

Direct Quick Impact
Some news you can take for face value if it carries a big surprise, something unexpected, or a shock. Stock prices always react quickly up or down:
•    Oil price change per barrel, especially for oil and airline stocks.
•    Company announcement of merger or takeover.
•    Unexpected warning of good or bad development by a company.
•    The sudden fall of a big company that may affect the whole industry.
•    A major terrorist attack, war, or natural disaster.

Uncertainty
The stock market hates uncertainty, which always leads to falling stock prices. Uncertainty can linger for several months or more. Besides, uncertainty is contagious. It can even lead to fear and panic:
•    Current financial crisis causing the collapse of many bank stocks.
•    Current global recession and uncertain prospects for recovery.
•    Consumer and business confidence.
•    Rising unemployment, inflation, or government deficits.
•    Political instability.

Joy & Fear
The stock market responds to expectations and emotions. Joy and fear are the extremes of market sentiments. The former leads to a bubble while the latter leads to panic sell. When you hear good or bad news, you must try to observe if the market is approaching either one of these two states.

Cause & Effect
Any news can be seen to affect the stock price. It all depends on how you interpret it. Let’s take an example. Heavy rains have brought floods to your city recently. The stock price of ADM has fallen by 10% the last few days. So it must be the heavy rains that damage the crops! This reasoning is flawed and says nothing about cause and effect.

Establishing cause and effect is not easy. Why? Because so many factors are involved in any event. The effect is really the net balance of those factors, or that of a few major ones. You have to be able to identify the major factors involved before you can establish any effect.

www.stockfessor.com
July 2009