The News: Novice Trap Number One
The News: Novice Trap Number One
When talking to prospective students of Online Trading Academy, it never ceases to amaze me how "conventional wisdom" about investing and trading is so far removed from the realities of successful speculation. It's not even funny.
Some of the blame for this misinformation is in part due to the Wall Street marketing machine. The one that propagates hopeful rhetoric such as, "invest for the long-term," and is designed to keep people continuously in the market - regardless of whether the risk is high. The motive is to keep the steady stream of fees unabated, and the only way to do so is to maintain those assets "in House." I don't mean to paint everyone in the financial services business with a broad brush, as there are decent, hard-working people in the business that try to do the right thing for their clients. I should know; I used to be one of them.
The other part of these wrongheaded notions are simply our inherited human tendencies, or put another way, the fact that we are emotional animals. Most people only invest when they feel comfortable and sell when the feeling of discomfort is unbearable.
News releases are one aspect of the market that most novice traders misinterpret as useful in making trading decisions. That's because most unsuspecting investors don't realize that the market looks forward and is anticipatory in nature. When was the last time that you recall the stock market putting in a major low on a wonderful economic news release? Conversely, if my memory serves me correctly, not one market top has come when the news was horrible regarding corporate profits.
Case in point: On Friday, March 4th, the highly anticipated February Non-Farm payroll numbers were released. Both numbers beat the consensus forecast, and yet if you look at chart of the ES (E-mini S&P 500) below, the market sold off that day. Notice that in the two days leading up to the report, the S&P's rallied strongly.
Figure 1
Is this a Wall Street conspiracy? Or simply the market's way of pricing in future events?
I believe it to be the latter.
Coincidentally, the ES rallied into a very good supply zone (shaded in yellow) that day, and our students are trained to be sellers in these zones, not buyers, regardless of what the news is.
In some of the crowds I mentioned earlier (prospective students), I hear conversations like: "If I only knew what tomorrow's news would be today, I'd make a mint." Well, first off, that would be illegal, but legalities aside, let's assume that this gentleman did have the Non-Farm payroll numbers on the Thursday before the announcement. And let's also assume that he traded based on those false assumptions that most untrained novices operate under. "The number is a good one, therefore, I'll buy just before the release" is likely the internal conversation that transpired. As we know now, this person, if he were real, and other actual traders who bought that morning have never seen the light of day and are still underwater.
This example occurs quite often and that's not to say that we should completely ignore the news. It's not necessarily the news that's important, but rather what the market's reaction is to the information.
Some traders actually never pay attention to the news as they figure that price will tell them all they need to know about the next low risk setup. I'm sort of in the middle when it comes to the news, since quite frequently, the market's response to the news could be a clue as to the overall health or future direction of stocks. At extreme levels, too much of a good thing is actually a negative for the market, as is the case when excessive negativity turns out to be very bullish.
In the chart of the ES (E-mini S&P 500) below, we see the first week of March 2009 (highlighted in yellow) in which the prior month's employment situation was revealed that the economy had shed about 651,000 jobs, the worst jobs loss since the financial crisis began.
Figure 2
In retrospect, that week marked the bottom of that entire decline amidst the worst news possible. Would we have known then that we were nearing a bottom? Not exactly, but if you go back to that week, and read what I was writing, I wasn't what you would call a raging bear.
When it comes to the vast amount of information being disseminated, it's best to think about it in terms of how the market has "discounted" the news, and where price is trading in relation to the overall trend, supply and demand levels. This way, you'll be thinking more like a professional and not like that person who has no clue about how the markets really work, and is just now feeling comfortable enough to get back into the market.
Until next time, I hope everyone has a great week.
- Gabe Velazquez "
About Gabe Velazquez
Gabe got his start in the markets as a broker trainee for Paine Webber, a mere 3 months before the market crash of 1987. That experience brought to light the importance risk management plays in trading and investing. In fact, it's greatly influenced the way he trades today. He spent 15 years as a stock and commodities broker, conducting technical analysis seminars through-out Southern California. After many years of managing other people's money, Gabe now concentrates full time on trading his own portfolio and teaching. He currently holds a series 7, 63, 9 and 10 (securities and options principals license.)
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