No matter how many times I say this, it’s still easy to fall into the trap of trading the news. You’ll see that on Bull Markets, I generally don’t talk about politics, news, events, etc.
- Firstly, you don’t know what the news will be before it is released. Anyone who tries to predict the news is just guessing.
- But more importantly, you have no idea how the stock market will react to a piece of news.
I’ve seen this happen so many times before:
- The stock market can go up on news that you think is “bad”.
- The stock market can go down on news that you think is “good”.
*And of course, when the stock market goes up on “bad” news, some idiots scream “MANIPULATION!!”. Like “it’s a bubble”, “manipulation” has become the default word for “I don’t know why the stock market is doing what it’s doing, so there must be some evil force pulling the strings out there.” Ok buddy. For every 100 conspiracy theories, only 1 turns out to be true. That’s a 1% success rate.
Price action vs. news
More importantly, it is not a good idea to trade “price action vs news”. “Price action vs. news” is a trading strategy that we used to employ when trading USLV (silver 3x leveraged ETF) and NUGT (gold miners 3x leveraged ETF).
What is “price action vs news”?
This is basically seeing how the market is reacting to a news, and whether it’s “abnormal” or not.
- If a “bad” news comes out, and the market goes down, that’s normal and bearish. The concept behind this is that “the market ‘should’ go down on bad news”
- If a “bad” news comes out and the market goes up, that’s abnormal and very bullish. The concept behind this is “if bad news can’t even bring the market down, imagine how much underlying strength there must be in this market”.
- If a “good” news comes out and the market goes up, that’s normal and bullish. The concept behind this is that “the market ‘should’ go up on good news”
- If a “good” news comes out and the market goes down, that’s abnormal and very bearish. The concept behind this is “if good news can’t even bring the market up, imagine how much underlying weakness there must be in this market”.
We used this concept when trading gold and silver, and it worked out well. But it failed miserably in the stock market. Why? Because the stock market’s reaction to news is random 40% of the time.
For starters, you cannot objectively define what counts as “good news” and what counts as “bad news”. It’s never that simple.
Remember how after Trump won the 2016 election, everyone thought the world was going to end? That’s what every media network – including CNBC, was telling you. When the stock market fell on news of his initial victory, CNBC said “stocks are crashing because of Trump”. But later that night when the stock market reversed upwards very strong, CNBC said “stocks are soaring because of Trump”.
*These 2 headlines were within 24 hours of each other.
As you can see, anyone who traded the news got slaughtered. The stock market’s initial reaction to the news was a fake reaction.
Using price action vs. news to trade might have worked in the past, but it doesn’t work any more.
On the issue of a “catalyst”
Traders often assume that big movements in the stock market need a “catalyst”. That’s incorrect. Throughout hisotry, most of the stock market’s movements have had no “catalyst”. The stock market goes up merely because the economy is improving most of the time on a day by day basis. There’s no fancy headline to mark this slow improvement. It’s just normal people living their every day lives, working hard, producing goods and servcies, etc.
The media often tries to find reasons to explain declines in the stock market. Most of the time, there is no single reason that “caused it”. You’ll often see someone on financial media say “XYZ caused the stock market to fall”. But when you actually look at the event’s date vs. the stock market’s decline dates, you realize it doesn’t make sense at all! XYZ happened 3 months before the market fell! The dates don’t even match up!