Stock Exchange: Do You Trade Short-Term News Flow?

The Stock Exchange is all about trading. Each week we do the following:

• Discuss an important issue for traders;
• highlight several technical trading methods, including current ideas;
• feature advice from top traders and writers; and,
• provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Caught Leaning Into A China Trade? Now What?

Our previous Stock Exchange asked the question: Caught Leaning into a China Trade, Now What? We noted that non-US markets in general, and China in particular, have been underperforming the US market significantly this year, but we recently saw signs of a potential violent snap back. And also as the persistence of certain market conditions grow, it’s not uncommon for traders to lean more heavily into their trades.

This Week: Do You Trade Short-Term News Flow?

Short-term news, whether accurate or false, can dramatically move the price of a stock; however, in the long-term, it is the underlying company’s worth that determines its value. According to Warren Buffett’s mentor, Benjamin Graham:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Many investors interpret this to mean it is wise to ignore the short-term noise and to instead invest only for the long-term. To the contrary, many traders use short-term noise to generate profits. To which camp do you belong?

For example, whether entirely accurate or not, Tesla’s Elon Musk recently tweeted that he was considering taking the company private at a significant premium to its short-term market price. This resulted in a very swift and dramatic (short-term) increase in the share price of Tesla (NASDAQ:TSLA). Some market pundits have argued that Musk’s tweet was false, and intended only to burn the many Tesla short-sellers that the CEO loathes (and such behavior doesn’t seem implausible after Musk’s treatment of a popular Tesla bear, and Seeking Alpha contributor, Montana Skeptic).

However, some traders used this short term price moves to place trades. For example, we review our open Tesla trade later in this report. And for reference, the impacts of Musk’s tweets are still being examined (See: Tesla Receives Subpoena Over Musk’s Take-Private Tweet).

As another example, back in 2010, stock markets experienced a short-term and extremely dramatic intraday sell-off referred to as The Flash Crash. And some short-term traders were able to profit from the event while most investors simply ignored it because it was not reflective of long-term valuations. Here is a “flash crash” chart…

Even our current Twitter-in-Chief and his election competitor, have been known to put out tweets, whether kosher or not, that move markets. For example:

• Hillary Hammers Biotech: Clinton Tweet On Price-Gouging Smacks Stocks
• How Trump’s pre-jobs report tweet moved the market

Of course, trading around short-term news can take many different forms. For example, Visual Capitalist does a great job explaining (visually) how some use short-term moves to trade around their current positions, while others use strategies less long-term in nature, such as swing trading, day trading, and scalp trading (see: Four Different Styles Used for Trading Stocks). Even the trading styles of our own technical models vary significantly, as shown in the following table, based on time horizon.

Model Performance:

And per reader feedback, we’re continuing to share the performance of our proprietary trading models, as shown in the following table:

We find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

This week’s Stock Exchange is being edited by guest contributor, Blue Harbinger (Blue Harbinger is a source for independent investment ideas).

Expert Picks From The Models:

Holmes: This week, I purchased shares of Tesla (TSLA) on 8/17. Thoughts?

Blue Harbinger: Why?

Holmes: I bought because I am a dip-buyer, and as you can see in the following chart, there’s been a nice setup on TSLA.

BH: I see the dip, and I know why the dip (it was the aftermath of Musk’s “go private” tweet), but are you not worried about the business? It has very high short-interest, you know. And the fundamentals are not strong. Here is a look at the Fast Graph.

Holmes: My typical holding period is around 6 weeks, and I exit when my price target is hit (or when my stop loss order hits). Long-term fundamentals are not extremely important to me. For example, according this article (10 Great Technical Trading Rules) by NewTraderU:

“We learned just to go with the chart. Why work when Mr. Market can do it for you?” – Paul Tudor Jones.

But thank you for sharing the Fast Graph.

BH: You’re bold, Holmes. I’ll check back in with you on this technical trade in about 6 weeks. And how about you, Road Runner–any trades this week?

Road Runner: This week I purchased Restoration Hardware (RH), as shown in the following chart.

BH: I see you bought in the lower end of a rising channel. That is your modus operandi, correct?

RR: Correct. I am basically a momentum trader that likes to buy in the lower end of a rising channel. I usually hold for about 4-weeks.

BH: You do realize this is another stock with a high level of short interest. I have included the Fast Graph below, but I am assuming you are going to tell me you are interested in the technicals, not necessarily the long-term fundamentals.

RR: You’re right. Here is the longer-term price action, for your consideration.

BH: This stock has been the subject of all kinds of odd price action, insider buying and extreme short sales over the last year, but the price has continued to rise dramatically. I know you’ve had a lot of success trading this one over the last year, Road Runner. Thanks for sharing this idea.

RR: Thanks. How about you, Athena–Any trades this week?

Athena: This week I bought shares of Molina Healthcare (MOH).

BH: The market liked this company’s recent earnings announcement. Why’d you buy?

Athena: As you saw in our earlier table, I am a momentum trader. And the setup on this one looks good. I typically hold for about 17-weeks.

BH: You also have a great track record, particularly over the last 6-months, as shown in our earlier performance table. This company’s earnings came in way ahead of expectations, and according to the CEO:

“Our second quarter results are a strong indication that the early stages of our margin recovery and sustainability plan are working,” said Joe Zubretsky, President and Chief Executive Officer. “Our focus on managed care fundamentals and a more rigorous performance management process is reflected in our improved earnings.”

Here is a look at the Fast Graph.

Athena: Thanks for noticing and sharing. And how about you, Felix–any trades to share.

Felix: No trades to share, but this week I ran the stocks of the S&P 500 through my model, and I’ve included my top 20 ranked stocks in the following table.

BH: I see Advanced Micro Devices (NASDAQ:AMD) and Chipotle Mexican Grill (NYSE:CMG) are your #1 and #2. Those stocks have done well in recent months, so let me guess–you’re also a momentum trader?

Felix: Correct. However my typical holding period is about 66-weeks, considerably longer than the other traders.

BH: Interesting. Chipotle has been volatile in recent years thanks to food-borne illness outbreaks, but it seems to be back on track now. And AMD is a semiconductor company that can be at the mercy of market cycles, but it too appear to be firing on all cylinders. Thanks for sharing. And how about you, Oscar?

Oscar: This week I ran the stocks of our comprehensive and diverse ETF universe through my technical model, and my top 20 rankings are included in the following list.

BH: I see Amplify Online Retail (NASDAQ:IBUY) and SPDR S&P Health Care Equipment (NYSE:XHE) are at the top or your list. I appreciate these sector and ETF rankings. They give good perspective. You too like momentum, and you typically hold for about 6 weeks. This is valuable information. Thanks, Oscar.

Conclusion:

To some, short-term market moves are just noise that should be ignored. While to others they creates trading opportunities of varying degrees. And whether you’re looking to identify long-term buying opportunities based on market dips, or if you’re looking to trade more frequently to generate quicker profits, one person’s trash (noise and volatility) can be another person’s treasure (opportunity).

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.