How Can You Use the News to Trade Profitably?

In this issue of Market Slice, we want to answer the question We want to answer the question “How Can You Use the News to Trade Profitably?” by discussing the news cycle, volatility, and more!

News Cycles in the Age of Declining Attention Spans
It’s a well-established fact that the attention span of the average American is ridiculously short, now trailing that of a goldfish.

While this trend has impacted every aspect of our culture, one place it shows up with profound effect for traders and investors in is the 24-hour news cycle.

Are you still paying attention? Just checking…

According to Wikipedia, “the 24-hour news cycle arrived with the advent of cable television channels dedicated to news[1] and brought about a much faster pace of news production with an increased demand for stories that could be presented as continual news with constant updating.”

What this means is that items move into and out of the news spotlight with amazing rapidity. 

“Here today, gone tomorrow” is the outcome of most news stories. And that provides an opportunity. Two opportunities, actually.

On one hand, it means that smart investors can get ahead of market moves by anticipating which stories are likely to gain exposure in the days and weeks ahead.

One version of this is called “insider trading”… people (Fed officials or Congresscritters, for example) with advance information about what is about to happen can make money by taking positions based on their privileged knowledge. This used to be considered illegal, but these days it’s pretty much business as usual. You don’t have to have inside information to get ahead of the news cycle, though. Diligent research will often turn up little-known or soon-to-become public facts that can move markets.

The other way to profit from the dumbed-down news cycle is to continue following important events after they’ve fallen off the media radar. Often these “subsequent developments” will hold clues to the next round of sensational news.

For example, China’s Evergrande real estate debt crisis triggered some market activity in the fall, but since then, the story has slipped from the public eye. While most opinion holds that the danger posed by a debt collapse in China is past, attentive researchers understand that the crisis is far from over. What will happen when the next shoe drops in the Chinese debt markets? Smart news event traders will be prepared. Others, maybe not so much.

Fear and Greed, Revisited
We have talked a lot about fear and greed in previous posts. These twin emotions drive many trading decisions, for better or for worse.
It’s as old as the markets… as old as any form of trading, really. Fear of loss and greed for gain are fundamental human conditions.
The question is, what does this mean for our trading?

In the broadest sense, we can say that greed fuels bubbles, and fear sparks panics. People buy the stock market even though prices are exorbitant, because they don’t want to miss out on future gains. (Ironically, this is a form of fear, as well… FOMA, the fear of missing out.) And the masses sell when prices are crashing, but usually not until thing hit bottom. Until then, fear of taking a loss actually prevents them from unloading their losing positions.

Shorter term, these emotions also drive daily fluctuations in the market. One gauge of where the market stands on the fear and greed spectrum at any given time is CNN’s Fear and Greed Index.

As you can see, the market is skewed toward fear at this time, but only slightly. There is no panic in the markets.
Here’s how that looks in terms of price movement:

Note that the RSI and Stochastics are exhibiting normal patterns. This would indicate that the recent correction was just that, and that no major market reversal is immanent.

Understanding crowd psychology is a vital skill for traders. If you want to avoid getting trampled by the herd, you must cultivate the ability to zig when others are zagging. Or, as Warren Buffett puts it: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”

The Vacillation of the Masses
Yes, that says “vacillation.” We’re not talking about that other V-word!
vac·il·la·tion /ˌvasəˈlāSH(ə)n/
1.the inability to decide between different opinions or actions; indecision.
“his vacillation between conciliatory remarks and recriminations”
In the markets, vacillation shows up as volatility.

Under normal circumstances, prices move in a relatively orderly fashion, sometimes up, other times down, and often sideways.
When sudden changes in market sentiment take place, however, we can see huge swings in price activity. These swings are termed “volatility.”

Here’s a chart of the VIX, which measures volatility in the S&P 500, covering the same one-week time period shown on the price chart in the previous article:

A comparison of these two charts will reveal the effects of adverse news events – in this case, the threat of rising interest rates and the November Omicron scare – on trader psychology.

In both cases, the fear passed quickly, illustrating the short-term nature of the news cycle discussed above.

Zooming out, we can see that stock prices have been in a sideways channel for a while… this one-year chart shows a breakout above 4300 in July of last year, with a re-test of that level in October, and again in January.

The market tested the top of the channel at 4750 over New Years, but then broke down all the way to the bottom of the channel, before bouncing again over the last few trading days (as we write on Tuesday.) So although the prices have been trading in a band, it is a very wide band. This reflects the increasing volatility we’ve seen, as traders vacillate between the expectation of a resumption of the bull market, and the fear of an impending bear turn.

In keeping with this week’s theme, what this shows us is the importance of trading volatility with a long/short strategy. Realizing that we are in a volatile phase presents exciting opportunities for alert, flexible traders.

FFR Trading’s Strategy Team can help you with strategies that position you for profits, whichever way the markets go. Call (800) 883-0524 , or click the Calendly link, to schedule a free consultation call!

Additionally – did you catch Ian Cooper’s recent webinar on How to Trade World Events? The replay is now up on FFR Trading’s YouTube channel. Go here to check it out, then call (800) 883-0524 to request a copy of Ian’s News Event Trading Strategy Guide. There’s no cost for this fascinating report.

Thank you for joining us for this week’s issue of Market Slice! Visit our Instagram, Facebook, and Twitter for more frequent market updates, trading news, investment inspiration, and more free goodies/webinars! Happy trading, everyone!

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