Trading The News

The most valuable commodity in the markets is information. For traders, it is absolutely critical to have access to the latest market moving news and data for this reason Lightspeed  now includes a real-time streaming news feed in its trading platform. This aspect of the trading game is often overlooked, but most short-term strategies incorporate news in one form or another. The exception  to this may be pure quantitative strategies and  high-frequency trading which rely on statistical relationships between different stocks and asset classes. Some quantitative traders, however, have developed algorithms which are designed to trade on computer-readable news which is provided by data vendors such as Bloomberg and Reuters.
The reason that news is so critical to successful trading is that it is frequently the catalyst which triggers elevated levels of volume and volatility. This is true in the broader market as a whole and in individual stocks. In the equity market, one of the most important aspects to short-term trading is stock selection. The ability to consume and interpret large amounts of market news on a daily basis is paramount to finding the best risk/reward trading opportunities. This is particularly true for stock traders, but news is also an important aspect of successfully navigating commodity, foreign exchange and fixed income markets.
The stock market has thousands of symbols for traders to choose from in search of opportunities. Each day dozens of stocks experience elevated volatility based on a vast array of news items. While incredibly important to day traders and other short-term speculators, trading on the news is not straightforward. It is not as simple as buying a stock on good news and short-selling on bad news. Since share prices frequently gap at the open of trade to reflect the most recent developments in a stock, oftentimes the latest news will already be priced in before an individual trader can place an order.
The market, however, is not completely efficient and does not always fully reflect all available information. Important news also frequently breaks during trading hours. By being a news hawk and cultivating the ability to to interpret company-specific data it is possible to gain an edge over other traders. Successfully trading the news requires hard work and some creativity. The type of information that has the potential to move stock prices is extremely diverse and vast. Even the smallest tidbits of stock-specific information can provide an edge.
The most frequent catalyst for significantly elevated volatility in stocks is earnings reports and guidance. These quarterly reports can provide excellent news-based  trading opportunities when combined with strong risk management. In addition to focusing on the company that has released its quarterly results, traders should also look for opportunities in related stocks. For example, Apple (NASDAQ: AAPL) has a massive supply chain and many of its suppliers are publicly traded. When Apple reports its earnings results, many other stocks will move based on its quarterly numbers.
Instead of trading just Apple, traders could look for opportunities in chip suppliers such as Skyworks Solutions (NASDAQ: SWKS), Cirrus Logic (NASDAQ: CRUS) and Broadcom (NASDAQ: BRCM). Zagg (NASDAQ: ZAGG), a small-cap manufacturer of protective coverings for Apple products, is another name that is often volatile after Apple's earnings. Trading the stocks of suppliers and competitors in the wake of a company's earnings report can be a profitable niche. Traders may also find opportunities by trading in the pre-market or after hours while listening to a company's conference call.
Buyout news can also be profitable by focusing on competitors of the company that has been acquired. For example, when PetroHawk Energy was acquired by BHP Billiton (NYSE: BHP), the stocks of other independent energy companies with shale assets rallied sharply. In the biotech space, clinical trial data and FDA drug approvals are a consistent source of opportunity. When Vivus' (NASDAQ: VVUS) weight loss drug Qnexa was approved by the FDA earlier this year, competitors Orexigen Therapeutics (NASDAQ: OREX) and Arena Pharmaceuticals (NASDAQ: ARNA) yielded great trading opportunities for days. The stocks were also very active leading up to the decision.
When companies release clinical trial data, it frequently not only effects their share price, but also the share prices of companies with similar drugs on the market or in their pipeline. Traders can also consult a calendar such as pdufadate.com to stay apprised of upcoming Advisory Committee dates and FDA drug approval decisions. This information can be very valuable in finding opportunities in the highly volatile biotech space.
The IPO space is another favorite of traders. An edge can be gained by doing research into upcoming IPOs and attempting to gauge the amount of institutional interest in a new issue before it begins trading. Hot IPOs can yield big profits for short-term traders when they hit the market. Another opportunity is when IPO lock-ups expire and existing shareholders are free to sell their stock. These days frequently make for great shorting opportunities. For example, on Friday, December 14, Facebook's final lock-up expired and the stock fell more than 5 percent, with most of the losses coming intra-day.
Management changes are also important news items. One of the most consistent shorting opportunities is when a company's CEO or CFO abruptly resigns. Also, when a company hires a superstar CEO, the result is often a rally in the stock. Yahoo's (NASDAQ: YHOO) hiring of former Google (NASDAQ: GOOG) executive Marissa Mayer is a good example of this phenomenon.
Another predictable catalyst for a stock's price is when a noted investor takes a large stake in a company. When a hedge fund or other institutional investor acquires more than a 5 percent stake in a company they are required to file a form with the SEC. These disclosures along with quarterly 13-F filings, which show the long equity positions of money managers with over $100 million in assets under management, move stock prices. Traders should pay particular attention when an activist investor such as Carl Icahn or Third Point Capital's Dan Loeb gets involved with a stock.
News coming out of high profile investment conferences also invariably moves stocks. Fast traders can make money when an investor such as Greenlight Capital's David Einhorn talks about a stock. Having access to this information in real-time can be very profitable. Getting a leg up on the competition also means tracking the latest commentary and changes in earnings estimates from Wall Street analysts. Having access to analyst reports from banks and brokerages can be key as they move stocks on a daily basis.
Among the most reliable catalysts is when an analyst changes his or her earnings estimates and/or price target on a stock. Sometimes, brokers will also provide tactical trading recommendations to their clients in these reports. Finding out about these developments prior to the market open can provide individual traders with an edge.News about upcoming product launches is also important to track. Frequently, these product launches will trigger a longer term move in a stock as well as the initial pop when the information becomes public. In the technology space this type of news is particularly valuable.
Like hard news, rumors also move stock prices and being aware of them can be a key to finding opportunities. For example, a rumor that Groupon (NASDAQ: GRPN) co-founder and CEO Andrew Mason might lose his job recently triggered substantial volatility in that stock. Rumors run the gamut from potential buyouts, management shake-ups and share offerings to fraud speculation. Acting quickly on a market rumor can yield big profits.
The ideas presented here only represent a small fraction of the different ways that traders can utilize news to find good risk/reward opportunities. Over time, it is possible to develop a significant trading edge by becoming highly skilled at uncovering relevant news items and successfully interpreting and applying them in the markets. When it comes to the stock market, reading the news can make you money.