The Role of News in Fundamental Analysis
Good trading decisions are always based upon good information - information that is accurate, significant, and timely. But it can be difficult to trade on news. News does drive the stock market in the short term, and the Internet has irreversibly altered the presentation of corporate news and financial reports. Traders can now get immediate access to real-time news services, and those with both the time and inclination can closely monitor the news that is expected to have a significant effect on stock prices.
Stocks are generally priced efficiently, reflecting all the economic information and company news available. That is not saying it is impossible to trade based on news. Once an item hits the wire, those trading on news must analyze the content, weigh its impact, and then quickly make a decision to buy, sell, or do nothing. Stock prices don't adjust instantaneously. This can allow a trader to exploit opportunities when stocks have not yet adjusted to reflect the minute-to-minute news when it is announced.
The Big Picture
To begin trading on news, you need to develop a framework to work within. Good fundamental analysis includes educating yourself about financial principles and the economy. The first step in every analysis is to understand current conditions and trends in the economy as a whole, as well as how the different industries are likely to perform. For this step I like to read the weekly and monthly business and news magazines.
It is true that much of the news in them is already old and already priced into the market. But just because news is now immediately available 24/7 on the Internet doesn't mean magazines are no longer useful. They still have their place and due to their publishing characteristics they luxury of being able to write in more depth on many subjects. This kind of news vehicle is perfect for getting you to think about longer-term trends and help you develop the big picture.
The other reason to read magazines is that they act as a filter. Even if all the news and information you need is available on the Internet, there is so simply so much available that it would be a full time job to try and read it all. By focusing on the most important news and trends, magazines help to prevent you from suffering information overload.
It really does not take that much time to keep up on the most important general news. Below is a list of the major financial magazines that can not only give you good investing ideas but an overview of the stock market, the economy, and news from across the world.
|Kiplinger's Personal Finance||Monthly|
The next step to incorporating news in your trading is to understand the various industry sectors. The major market indexes get most of the press, but exchanges and financial institutions now provide many ways to follow specific markets and sectors, either through sector indexes or exchange-traded funds (ETFs). These sector indexes and ETFs allow you to see which industry sectors are leading and which are lagging the market.
Sector analysis allows an investor to take advantage of specific market segments. Even on the most lopsided trading days, there are industry sectors bucking the trend. Sector analysis allows investors to be in the segment of the market that is making money irrespective of the overall market direction.
They can also be used in a strategy called sector rotation, which involves moving your investments from one industry sector to another in an attempt to beat the market. By dividing the business cycle into stages, it becomes apparent which are the historically successful periods for stocks in certain business sectors. With this general outline in mind traders can try to judge what stage of the economic cycle we are in and then anticipate which industries will outperform the market and which will do the worst.
To be a competent fundamental trader you must understand how industry news can affect the companies you are trading. Many traders focus on just a couple industries, taking long positions in the strongest companies and short positions in the weakest. It can help to get on the mailing lists for publications and trade journals that focus on industries that you follow.
Traders should always be familiar with the important factors and reports that can affect your trades. Every industry has a trade group that issues reports on important metrics in that industry. And naturally you should be up to date on news from competitors. News of a new more advanced product launched by one company can suddenly lower the value of a competitor that relies on an inferior product for a significant amount of its income.
The Daily News
Finally, trading on the news requires staying on top of the daily news and monitoring announcements and prospects of the individual stocks you are following. Traders face a large array of inputs for their trading decisions. When using your favorite sources of information, the challenge becomes separating the noise from the really important data that can lead to profitable trading decisions.
There are daily publications that can help you with this, most notably the wall Street Journal and Investors Business Daily. There are also many daily financial news programs on TV, with CNBC the single channel you are always likely to see on when visiting a trading floor. But much of the fundamental information and news you need for trading can now be found on the Internet.
With news it can happen that an item that is useful to one person or may not be useful to another. You have to research the information and see if it can assist you with your particular trading methodology. Since there is so much information coming in all the time, that means you have to learn to filter out the information that is "noise" to your system.
All traders should become familiar with the important factors that affect your trades. If you're trading commodity futures this means government reports and the reports from companies that publish relevant information (such as visible supply, acreage planted, weather reports, cattle and hog reports, etc).
If you're trading stocks, look at the company news, financials, and annual reports. You have to read industry reports, collect articles, and gather information from every source that has anything to do with your chosen target. Companies have earnings reports scheduled each quarter, which will always cause some kind of market reaction.
You must also pay attention to all the common and recurring technical indicators. Years ago, money supply numbers were important. Now they no longer move the markets much but unemployment, inflation and GDP reports often do, as well as announcements from the Fed and G-7 meetings. Make sure you are aware of the times these recurring events take place, and consider them when planning your trade.
Here are just a few of my favorite financial and general news sources on the Internet:
There are many more available of course. You will have to go through them (and any others you like0 to see what best fits your trading style. Portals such as Yahoo! Finance, which is one of my favorites, are nice because they aggregate information from across the web and display it in one place. Google Finance and MSN Money (which has my favorite deluxe stock screening tool available for free) are also primarily content aggregators, although MSN has a number of good columnists as well.
Of the other financial news site, each has its strengths and weaknesses. I tend to favor MarketWatch myself because I find it has the best news on the economy but does as well as any in the company and financial news as well. TheStreet.com has the best earnings calendar but I now use it less since it went to a more video-based approach (which can really slow you down when trying to get news fast).
Trading on the News
Financial and economic information is released continuously, and it takes time for all the investors to digest any news, individually decide on its implications, and then take what they feel is the appropriate action (if any). In most cases, a trader should make a trade based on a piece of news only if he thinks the news will trigger a significant price change that he can catch in time.
News can make stock prices change because it changes expectations for the future. The speed of adjustment therefore becomes a key issue here. If a trader plans to make any trading profits out of a news event, he has to act quickly. The first step of any successful news play is fast and accurate analysis of the content.
The next, and hardest part, is to correctly project how that news will affect the stock price. I say this second step is the hard part because what seems like bad news (at least to me) often seems to produce a counter-intuitive rise in the stock price, and visa versa. It is not unusual to correctly identify a piece of news that will move a stock price and then guess the wrong direction. That is why many professional traders prefer more reliable volatility-based trades (such as straddles or strangles) rather than directional trades.
Staying informed is a lot of work, but uninformed traders can't expect to win. The most successful traders are those who assemble that "new" data before anyone else through hard work, research, and analysis. I personally believe that with the tools, data, and information available today through the Internet, the opportunity to become a winning trader is now greater than it's ever been. Put in the time to develop a system that works for you, and take pride in each victory with winning research and planning.