The news is one of the biggest catalysts to be well aware of when trading.
That’s what we noted here just last week. It’s even something I teach to students.
Of course, the response to such “drivel” is astounding. No one can trade on the news. It’s impossible. Maybe you should learn how to trade, I was told the other day.
But whether you believe it or not, the news is a substantial part of any trade.
Despite what others believe, not all news is baked into the market and accounted for on release. According to the Journal of International Money and Finance (2004):
"The market could still be absorbing or reacting to news releases hours, if not days, after they are released. The study found that the effect on returns generally occurs in the first or second day, but the impact does seem to linger until the fourth day."
Even these studies prove news is impactful.
"I examine returns to a subset of stocks after public news about them is released. I compare them to other stocks with similar monthly returns, but no identifiable public news. There is a major difference between return patterns for the two sets. I find evidence of post-news drift, which supports the idea that investors under-react to information [ . . . ] There is a large amount of evidence that stock prices are predictable."
—Wesley S. Chan, M.I.T., Stock Price Reaction to New and No-News: Drift and Reversal after Headlines
"Arguably, the most important process affecting price movements is the news arrival process. For example, in Ross (1989) the volatility of stock price changes is directly related to the rate of flow of information to the market [ . . . ] On days no news arrives, trading is slow and price movements are small. When new information arrives that results in a change in expectations, trading becomes vigorous and the price moves in response to the impact of the news [ . . . ] In addition to price movements, news arrivals can affect the time between trades, number of transactions, and volume of trade."
—John H. Maheu, University of Alberta, and Thomas H. McCurdy, University of Toronto, News Arrival, Jump Dynamics and VLook at the power outage story for example.
That clearly wasn’t priced in immediately. And it provided traders an opportunity to trade the long and short side of the trade within two weeks in April 2017.
In early April 2017, cities went dark.
In San Francisco, more than 90,000 residents lost power. All thanks to “equipment failure, the catastrophic failure of a circuit breaker,” noted Pacific Gas & Electric. In New York, a power outage in Brooklyn brought several subway lines to a halt. All thanks to Con Edison equipment failure that knocked out signals, escalators, communications systems, and lights.
As the story was unfolding, stocks like Aecom Technology (ACM) – which recently merged with a rival to focus on the energy and transportation sectors sure to benefit from any news of Trump infrastructure plans. It took about a week for the news to be priced in.olatility Components for Individual Stock Returns
Then, as soon as the story died and the power went back on, ACM dropped.
It proves that news impacts stocks and should be paid attention to. This is just a random example of a stock impacted by just a blackout. Imagine the other opportunities you may miss every day because some one told you news should be ignored.
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