Many investors are "news investors". They watch for important news, interpret it quickly, and make fast investment decisions based on it.
These investors are "news experts" ... people who know how to interpret the news and the impact it will have on investor buy/sell reactions.
What's their secret?
They invariably have a conscious or sub-conscious mental model about the "AFFECT' a News Release will have on the stock market or a particular stock.
What's the formula for interpreting news events?
The formula has to do with the expected or perceived"EMOTIONAL REACTION" that any news release will have on an investor relative the underlying investment instrument.
Below, I have posted a matrix explaining the different "Levels of News", its interpretative Description, and most importantly ... the Emotional impact it has on individual investor reactions. The matrix is presented below ...
How can you find out about, and take advantage of breaking News when you invest?
By asking yourself one question: When "Bad News" is announced, ask yourself: "Who Benefits" and "Who gets Hurt"?
The answer gives you the clue to what stocks to Short, and what stocks to invest in for an upside move.
How can you get email News Alerts as they happen?
There is a new Google alert News service in a beta stage at Google.com It will allow you to monitor a developing news story, or keep current on a competitor, company or industry.
You can sign up for specific, breaking news by entering the news search term you want to be alerted about. You can access this free service by going to this link: Google News Alert Service
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This is a report written by Kendal Kulp, in April of '08. Kendal is my stepson and the youngest in the family. He is a smart and inquisitive 14 year old that "needs to know" how everything works. I was particularly happy to see that he wrote a report on "The Secret to Using News to Invest in the Stock Market" for one of his classes. He really understood the effect of News relative to stock movements. He has a very important message to share, and I hope that you benefit from his research.
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"The Secret to Using News to Invest in the Stock Market"
by Kendal Kulp.
News, really affects changes in stock market prices. First it is important to understand that investors react to their personal internal levels of greed and fear. This is very crucial in understanding when certain news can make a stock go up or down.
During my research, I stumbled across an old investor’s saying, “buy the rumor, sell the news,” and it caught my attention. I thought about it and realized that it does not always apply. I then found an article written by Marty Chenard of StockTiming.com about news and its effects and impacts on investor’s decisions depending on their “emotional reaction.” “They invariably have a conscious or sub-conscious mental model about the AFFECT a News Release will have on the stock market or a particular stock.”
I then came up with a strategy to use in conjunction with the “news” and peoples reaction to the news, to make commonsensical investment decisions. I call it the” fear factor.” This investment strategy plays off of people’s fear using the fear/greed level in the consumer/investor caused by news.
Knowing when investors start to panic is the critical key to the fear factor because the investor loses their ability to make logical investment decisions.
A good example of panic in the consumer/investor caused by the news previously effecting stock prices is the pet food recalls of 2007. The recalls started with the Canadian company Menu Foods (symbol MNUFF). On March 16, 2007 the price was $6.30. When the company voluntarily announced a recall on certain pet foods made with ChemNutra Wheat Gluten, after reports of fatal kidney failure among animals eating its products, the next trading day at closing on March 19, 2007 the price dropped to $3.63 that is down 43.6% (Pink Sheets). Around 90 days later, on June 19, 2007 the stock was down to $2.63, a 72.45% drop (Chenard).
I looked at the different fear levels people tend to follow in their decisions, and found this to cause emotional panic in the consumers and investors. This announcement caused the consumer to start to panic because their beloved, family pet could die. Similarly; investors may fear that their beloved money invested in a company such as MNUFF may die.
Then I thought about what companies would be positively affected by this news, and decided that the animal health sector would be affected the most. People would want to see if their pet had been “exposed” to contaminated wheat gluten, so they would take their pets to the vet.
I researched looking for veternarian chains and found a company called Animal Health International (symbol AHII). On March 7, 2007 the price was $11.50 per share. Around 90 days later on June 29, 2007, the price of the stock was $14.49. That is a 26% increase. Surveys found that 62% of the people that were aware of the news that pet food could possibly be contaminated became concerned, as more sound evidence was announced, the consumer’s level of fear increased to the point of panicking and changed from buying the cheap, unsafe pet food by retailers such as Wal-Mart, Safeway and PetSmart to buying Premium, Natural, and organic products (Animal Health).
To invest based on news one should use a four step process. One; they should look for news that is bad enough to get people to panic. Two; ask yourself who benefits and who gets hurt based on the emotional panic in the consumer or investor? Three; do research, based on your research decide on which stocks would go up and which would go down. Four; based on your decision, buy the stocks that you think would go up and short the stocks that would down. This is the “secret” to using the news to invest in the Stock Market using the fear factor.
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Works Cited: "Animal Health International, Inc." Google Finance. Google. 5 Apr 2008 <http://finance.google.com/finance?q=ahii>.
Chenard, Marty. "When and Why News Events Are Important." StockTiming.com. 7 Apr 2008 <http://www.stocktiming.com/Stock_Market_Models_and_Reports/Importance_of_News.htm>
"Menu Foods Issues Recall of Specific Can and Small Foil Pouch Wet Pet Foods." U.S. Food and Drug Administration. 16 Mar 2007. U.S. Food and Drug Administration. 4 Apr 2008 <http://www.fda.gov/oc/po/firmrecalls/menu03_07.html>.
Pink Sheets. Pink OTC Markets Inc.. 7 Apr 2008 <http://www.pinksheets.com/pink/quote/quote.jsp?symbol=mnuff>.
