Stock Exchange: Is Breaking News Useless Noise Or Trading Fuel?

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Includes: CGNX, CSL, VIPS
by: Jeff Miller

Summary

Breaking news stories often move the market, but are those moves fountainheads for trading opportunities, or are they just useless punditry-driven noise?

This week, the 10-year treasury yield reached its highest level in 7 years, a move that has caused many traders to take action.

Our regular participants offer specific trading ideas reflecting their contrasting styles.

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: What is the Foundation for Your Trades?

Our previous Stock Exchange asked the question: What is the foundation for your trades? For example, at NewArc, we've been using a combination of finite software programs and automated algorithms, combined with our in-depth economic and market analysis, as the foundation for our trading programs. However, every trader is different, and we noted the rise of artificial intelligence in trading as an example.

This Week: Is Breaking News Useless Noise Or Trading Fuel?

Markets sold-off hard on Thursday, possibly as the result of breaking news. For example, a Bloomberg story about China's "Big Hack" is one possible punditry-driven explanation for why markets sold-off, technology stocks in particular.

Or perhaps it had something to do with interest rate news (i.e. the Fed is hawkish and the 10-year treasury yield rose to its highest (intra-day) level in 7 years, +3.232%).

Such differing "breaking news" stories can serve as an important reminder to focus on the right kind of data. For example, Adam Grimes suggests that the "histogram" can be a powerful chart to consider in this article:

And he also explains (with a hat tip to Victor Niederhoffer) why you should never graph two things on the same chart to see how they move together.

And somewhat along these same lines, Dr. Brett Steenbarger takes his trading analysis to a higher level by suggesting traders move beyond linear thinking (such as the basic linear regression), and instead recognize that broader market cycles are not constant, and that accounting for these dynamics can be a powerful source for trading edge:

Model Performance:

We are sharing the performance of our proprietary trading models, as our readers have requested, 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: I purchased shares of Carlisle Companies (CSL) on Tuesday 10/2. This company manufactures and distributes engineered products, varying from construction materials to food services equipment. What do you think about that, Blue Harbinger?

Blue Harbinger: Interesting. Why'd you buy?

Holmes: In simple terms, I bought because I am a dip buyer. Or if you prefer, I am a technical trader focused on mean reversion during holding time periods of approximately six weeks.

BH: If I were purely a technical trader (which I am not), I'd tell you I like the setup, considering CSL has been trending sharply higher since 2010, at an even faster pace than the market (SPY), and it has also experienced some particularly pronounced and short-lived pullbacks during its rise; but I'd have waited for this pullback to have gotten a little more severe before buying.

Holmes: Didn't you read what Adam Grimes (and Victor Niederhoffer) said about graphing two things on the same chart to see how they move together? Isn't that what you just did conceptually with the SPY and CSL?

BH: It's called benchmarking, Holmes. Besides, Victor Niederhoffer is also famous for taking too much risk and then blowing up every market cycle, or so. Did you even consider the fundamentals on this trade? Here is a look at the Fast Graph.

Holmes: Thanks for your long-term fundamental concerns, but I am a technical trader (a successful one), and I'll be out of this trade in six weeks.

BH: Fine. I'll check back with you then. How about you, Road Runner--any trades this week?

Road Runner: I sold my shares of Cognex Corp (CGNX) for a small profit. I bought for approximately $54 per share in late August.

BH: I am happy that you profited, Road Runner. But I thought you only hold for 4 weeks. And did you even consider the fundamentals on this vision systems company? Here's a look at the FastGraph.

RR: I am indifferent about the long-term fundamentals. I bought the shares because I am a technical trend follower, and the shares had momentum on their side. More specifically, I like to buy shares in the lower end of a rising channel. And regarding the 4-weeks thing, that's typical, but not always.

BH: Okay then. Glad the trade worked out for you. And how about you, Athena--any trades to share with us this week.

Athena: I sold my shares of the Chinese internet retailer, Vipshop (VIPS), last week at a small loss.

BH: Well, it would have been a bigger loss if you held on through most of this week. The shares were down again (-4.0%) on Thursday. Maybe it was on the news of the "Big Hack" by China as we described above, or maybe that was just noise. Despite the strong US market performance this year, China (e.g. Shanghai) has been down. Our "Tweeter in Chief" bragged about this on Thursday, which I'm not so sure is a good idea considering the global markets are increasingly connected in many ways.

Anyway, here is a look at the FastGraph for VIPS too:

Athena: Thanks for your color commentary and fundamental data, but I will stick to my disciplined and objective technical trading process; it's been serving me well.

Felix: This week I ran the Nasdaq 100 (QQQ) through my model, and the top 20 rankings are included in the following list.

BH: I think that is a great list to consider on days like today, considering the market sold off hard yesterday, and some of the names on your list sold off especially hard. I suppose that is the "Holmes" coming out in me because I like to buy the dips too, although I am a long-term investor. What is your trading style, Felix?

Felix: I like momentum, and I typically hold for 66 weeks, which is longer than the other traders.

Oscar: I also have a ranking to share. Specifically, I ran our comprehensive and diverse ETF universe through my model, and my top 20 are listed below.

BH: I see the oil ETF (USO) at the top of your list. The energy sector can be a great investment during periods of higher inflation. Recall, it is a hawkish fed and inflation fears that some folks attributed Thursday's market sell-off to.

Oscar: I'm a momentum trader, and I typically hold for 6 weeks, so I am not sure how much inflation can actually occur during that period. I generally exit by rotating into a new sector or style ETF.

Conclusion

In some cases, breaking news is both useless noise AND trading fuel, meaning even though it should be ignored by traders--it isn't; and it moves the market. These market moves can be painful (if you get caught in the crossfire) or valuable (when it works in your favor). However, it most certainly helps line the pockets of Wall Street firms that generate more income when trading volumes go up (e.g. commissions, bid-ask spreads, front-running opportunities for the high-speed crowd).

Developing your own disciplined trading process can help you avoid the collateral damage of trading "noise," as well as help you meet your goals, whether that be income, capital appreciation, self-improvement, or even some combination of all three. All of our trading models use disciplined well-tested trading processes to make their selections. To learn more, follow the "Trade Alongside Jeff" link near the end of this article.

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.

Stock Exchange Character Guide:

Style

Average Holding Period

Exit Method

Risk Control

Felix

NewArc Stocks

Momentum

66 weeks

Price target

Macro and stops

Oscar

"Empirical" Sectors

Momentum

Six weeks

Rotation

Stops

Athena

NewArc Stocks

Momentum

17 weeks

Price target

Stops

Holmes

NewArc Stocks

Dip-buying Mean reversion

Six weeks

Price target

Macro and stops

RoadRunner

NewArc Stocks

Stocks at bottom of rising range

Four weeks

Time

Time

Jeff

Everything

Value

Long term

Risk signals

Recession risk, financial stress, Macro

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.

Trade Alongside Jeff Miller: Learn More.

Disclosure: I am/we are long CSL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.