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CATEGORY Investing philosophy

News Momentum: The Anticipatory Effect



January 08, 2017

We’re often taught that when news is released, it’s immediately priced into a stock.

But that’s garbage.

What that theory fails to account for is information friction, or the delay in the dissemination of news to a greater number of investors through electronic media.

If you have an intended reach of 100 people, and only 30 of them get the news, the other 70 people haven’t had an opportunity to react.

Once they do, though, there’s further reaction.

Sometimes the news or rumor we pick up on won't be fully disseminated, meaning the intended audience won't get it until later in the day when they get home from work. By then, we've already bought the stock and are just waiting for the trigger (the nightly news report, for example) that'll throw gasoline on our small flame.

As more investors learn of the news through dissemination, price and volume begin to soar depending on how good or bad the news is.  Then, there’s the reaction to the reaction. By that night, you might hear of the story on CNBC or see it the next morning in the Wall Street Journal. And way down the line, the story may make the weekly magazines like Time, Newsweek, Business Week, or Forbes, piquing further interest and buy activity in the stock. This is the reaction to the reaction.

News flow goes from local to regional to national to global… But it’s not picked up by the masses all at once, which creates friction. Press releases, TV, radio, newspapers, e-mail, Twitter, Facebook, Google news, national press, global press.   News runs from one investor to the next until it dies.

It may sound boring, but it’s very profitable.

We already know that when news dies, the catalyst is removed and the run soon ends.

Biotech is the perfect example of anticipatory momentum.

Let’s look at ACADIA Pharmaceuticals (ACAD) for example. I’ve been bullish on this once since $5 a share prior to its consistently great news on its Parkinson’s disease Psychosis drug. Once the drug was FDA approved, the news was out. Profits were taken. The stock predictably pulled back from a high of nearly $52.

Unfortunately, its key catalyst was being ignored again. After the latest pullback, we knew the company was about to release information on its Alzheimer’s disease Psychosis drug in the next month. This was public information. All a trader had to do was pick it up at the lows, and wait for the anticipated wave of momentum sure to come as we approached the ADP results. And that’s exactly what happened.

Typically, we try to find catalysts at least 3-4 months ahead of a key biotech date, such as an FDA approval, advisory panel date, Phase II or III trial, even a PDUFA date. With ACAD, such a low couldn’t be ignored.

The goal is to trade a catalyst long before the herd wakes up to it. Then, as we near the date in question, traders begin to accumulate, creating the buying frenzy with anticipatory momentum.

 


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