Yesterday, we began looking at news-based trading in terms of the structural advantages it offers smaller investors. These advantages stem from both the agility of the smaller trader and the intel-advantage over competitors who haven’t adequately invested in their data infrastructure.
This intel advantage is a sure path to market-beating profits. And, by combing a basket of short and long plays, it offers a unique opportunity for managing risk. Today, we’re going to think about when this informational advantage becomes most valuable. When is the news most heavily weighted in the markets' overall evaluation of a stock?
- The After-Hours Advantage + Rebalancing Lag: We’ve mentioned this one in the last few posts, and won’t go over it at length here. Simply by trading on extended hour news events, you gain an informational advantage on investors who only pay attention to intra-session news events. It’s worth noting that many retail investors only rebalance every month, quarter, or even year. Extended hours news events do exert influence on a stock price up to a full quarter out, and relatively passive strategies can certainly succeed using news-based trading approaches. Moving a bit quicker, however, does offer a potential advantage over traders who don’t like to actively manage their portfolio. After all, the gap between a news event and quarterly rebalancing can amount to months of lag in valuing a stock according to all available information. Stocks owned by a high proportion of buy-and-hold investors can offer a greater opportunity for news-based traders to strike first.
- Sector-Specific Dynamics: Certain sectors can offer news-based traders a greater potential for outsized gains. Think about this fact: news events are likely to have the most impact when they constitute valuable new information to even the most knowledgeable investors.
The future performance of some stocks is more readily predictable. In the Finance sector, for instance, sophisticated modelers have all sorts of relevant data (macroeconomic data, lending data down to the specific urban area, formal models of monetary policy, etc.) for judging future results from, say, a major bank. Compare that to a market segment like Pharmaceutical Development or earlier stage Tech firms. The biggest and best hedge funds may spend a lot of money trying, but they really don’t have any way to know which experimental drugs will work (while avoiding nasty side effects). And they certainly don’t know which app is going to become the next fad. In sectors like these, news events announcing everything from a growing user base to a promising clinical trial can drive truly astounding price movement.
- Small Caps Defined by Headlines: We’ve already mentioned one reason micro-cap stocks can make a lucrative target for smaller investors: firms managing large amounts of money can’t always efficiently trade stocks of this size. The volume is simply too low for them to react to news events without driving the price up in the process. There’s a second profitable dynamic underlying cap-size: small stocks are likely to be covered far less thoroughly by the financial press. Some microcap stocks are almost impossible to research thoroughly online and generate only a handful of headlines a year. In these cases, those news events will hold an outsized weight on the stock’s price: the less data is available, the more influential individual data points become.
If you’d like to learn more about news-based trading, there’s no better place than one of our totally free training seminars. We don’t put on a hard sell; we find that showing traders our platform up close is all that’s necessary. You can claim a spot in our next available session using the button below: