We humans have a burning desire to always know why things happen. Curiosity is an innate quality that most of us possess and in some respect, this is a great attribute. This inquisitiveness has led to wonderful advances and new discoveries in the fields of medicine, science and technology. It’s also what makes life fun and interesting. It can also be an entertaining endeavor when it comes to the financial markets. Trying to figure out (after the fact) why a market reacted a certain way satisfies our need to know, but doesn’t necessarily makes profitable traders. What do I mean by this?
Just tune in to any of the financial news stations and listen to all the punditry and analysis that goes on from folks that rarely make money from trading. These folks make their salaries from disseminating information that quite often has already been priced into the markets. The primary job of the financial news media is to inform us of why the market moved and then extrapolate other ramifications so that the audience stays tuned in. Pundits espouse their views of where the market is likely to go next and are no better than random in their accuracy.
So, can we trade in a news vacuum? In the sense that news is noise that tends to cloud our judgment, yes. That said, a trader should know when the news will be released, but not for the reasons you might think. We shouldn’t concern ourselves with the consensus views or what the numbers released tell us about the economy or any of that stuff. The instantaneous reaction of markets makes it almost impossible to predict in what direction the market will move after the release. Furthermore, reacting after the financial news will always lead us to chase price, resulting in a high-risk trade.
Instead, we should look at the news as an opportunity to engage the market in a low-risk manner. For one, we know the markets spike immediately after the financial news is released. This is a strong move that generally pushes the market into supply or demand. And unlike the conventional wisdom of buying after good news, or selling after bad news, we will take the opposite side of those trades.
In most cases, positive news pushes prices higher, getting the novice to chase, buying into a level where we can find objective supply. Conversely, gloomy news sets off a spate of selling into levels where institutions are willing buyers.
A recent example of this was last month’s Non-Farm Payroll release. As we can see from the 30-year T-Bond contract below, the initial reaction to the report was positive which induced the novice trader to buy right into an area where institutions were sellers (highlighted in yellow).
The number was a disappointment. The economy created 148,000 new jobs less than the consensus of many Wall Street Economists. The initial rally was caused because of the perception that a potential slower economy would lead to lower interest rates. But as we can see, that was the absolute wrong trade to make as Bonds embarked on a steep selloff.
The lesson here is the actual content of the news is to be ignored, but knowing when the financial news is to be released is important as this uncovers the illusion and the opportunity. Do you know which is which?