This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
[Editor’s note: Yesterday’s post on visualizing diversification was removed and will instead appear in The Globe & Mail on Friday. I’ll link to it when it has been published there.]
This week’s business news websites and papers are jam-packed in Ontario as both the provincial and the federal budgets are being presented to the public. This type of business news is very important. It tells businesses that reside in (or conduct business in) the area what changes might be made to any tax structure or about the plans for any stimulative events the government might be initiating. The news is critical to businesses for planning efforts and long term forecasting, but it is not always market moving. For news to be market moving, it must change a set of assumptions in a distinctive way that market participants currently have for the business and economic environment. This does not mean that budgets do not move markets. They have many times in the past and will continue to sometimes have that affect. However, just because a budget is released, does not mean you will see a market move from it or gain a trading idea.
The same is true for sector specific news and stock specific news. Just because there is news on a stock does not mean it will move the stock. Even if the stock does start to react to a piece of news, it does not always translate into a solid trading idea or good trading environment that you can make money from. A lot of at home investors I speak to mistake a piece of news on a stock for a trading idea. It is often not the case. It doesn’t mean the news is not important, it just means that it does not create a tradable idea. Keeping on top of a lot of general business news is very important as is staying current on the news of any stocks that you trade. Many good trading opportunities come from having a solid understanding of the issues a company is facing and being in the position to react quickly when actual market moving news is reported. A tradable opportunity arises when news comes out that changes (or opens the possibility of changing) the trajectory of the company. The news has to either promote buying or selling by shareholders to create a trading opportunity from that news piece.
Simply hearing a bad news story about a company should not trigger your sell finger to spring to action. You don’t want to be the only one selling. The negative news story must change the outlook or the current position of the firm.
This week, definitely review the budgets tabled, stay on top of as much sector and stock specific news as is relevant to you, just don’t do it with your hand constantly on the keyboard. When it comes to the markets, the more you know, the better. Just do not think you are seeing trading or market moving news, when you are really just seeing really important news.