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Why We Trade the Anticipation of News

October 16, 2017

No one can trade on the news. It’s impossible. That’s what many of us have been taught to believe. In fact, many still believe that new is immediately priced into a stock upon its release. However, as we’ve learned through practice and research, that’s just no true.

According to the Journal of International Money and Finance:

“The market could still be absorbing or reacting to news releases hours, if not days, after they are released. The study found that the effect on returns generally occurs in the first or second day, but the impact does seem to linger until the fourth day."

Of course, that just applies to the dissemination of news.

There are still two other ways to trade news, including the anticipation of news and the death of news. First, as we all know, news eventually dies. And as it begins to die, so does the excitement and momentum behind particular stock moves. We see it all the time. In fact, if you look at any of the Ebola stocks that soared long ago, momentum died, as the story died.

One of the most exciting ways to trade news, though, is through anticipation.

For example, if we’re aware of a new announcement from President Trump or from Congress, we want to begin looking at stocks that could run higher in anticipation of news. That’s because, as we near the catalyst, stocks have a tendency run on anticipation of what’s to come.

For example, in late September 2017, investors were well aware that the U.S. Senate would soon vote on a bill for defense spending. Any one that bought defense related stocks beforehand had an opportunity to do quite well. In fact, since the start of September 2017 leading up to the news:

  • Raytheon (RTN) ran from $180 to $183
  • Boeing (BA) ran from $235 to $253
  • General Dynamic (GD) ran from $196 to $202
  • Northrop Grumman (NOC) ran from $265 to nearly $276

We can even see the power of trading those same names on the dissemination of news.

In late June 2017, the House approved a $658 billion spending plans for the Defense Department. It included $584 billion for the base budget and $74 billion in war funding.

  • Raytheon (RTN) ran from $160 to $183 on the release of news
  • Boeing (BA) ran from $195 to $253 on the release of news
  • General Dynamic (GD) ran from $194 to $202 on the release of news
  • Northrop Grumman (NOC) ran from $255 to nearly $276 on the release, as well

The very idea that we cannot trade on news is old. In fact, ignoring news flow is actually costing you quite a few potential opportunities to make money.

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