Stock Exchange: Do You Trade News Cycles Or Market Cycles?

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: The Market “Ain’t What It Used To Be

Our previous Stock Exchange noted that The Market “Ain’t” What It Used To Be. We noted that secular market trends and technical trading conditions are always changing. And rather than getting stuck in the past, it’s important to pay attention to what the market is telling you.

This Week: Do You Trade News Cycles or Market Cycles?

Two weeks ago we covered the topic of False Market Narratives, and asked readers if they are able to ignore the “stories” created by media pundits. For example, every time the market is up significantly the media creates a narrative attributing the gains to something (usually something they approve of), and if the market is down significantly they create a narrative attributing the losses to something else (usually something they do NOT approve of), and voila–there’s your market narrative conveniently, perfectly and simplistically explaining precisely why the market moved exactly the way it did.

We implied in that previous Stock Exchange that it was a good idea to ignore the narratives fed to us regularly by the media pundits–but what if it’s not? What if there are actually profitable trading strategies based entirely on the news cycle? For example, Wednesday morning the Twitterverse erupted in response to President’s Trump’s tweet about a China trade deal–which contradicted the popular news narrative of the last few days that implied the sky was falling thanks to additional tariffs the president was expected to impose starting on Friday. For example…

Or this one…

According to the Detroit News:

“Some sophisticated traders with automated programs are using computer algorithms that instantly capture Trump’s Twitter remarks and then immediately buy or sell the affected stocks, analysts said.

“It’s in the algorithms. They’ve done it,” said Joe Gits, chief executive of Social Market Analytics Inc.”

But is this really possible? Or even fair?

Recall Tesla CEO, Elon Musk, recently faced serious scrutiny and repercussions from the SEC for his market moving tweets (e.g. “funding secured”).

It seemed the winning trade at the start of this week would have been to bet against the stocks most significantly impacted by the negative repercussions of the expected new and increased tariffs on China, or so the media would have you believe.

Or this headline…

Or perhaps traders are just upset that certain tweets are disrupting the profitability of their short-term news-cycle trading strategies. After all, the actual market cycle appears to have strength considering low unemployment numbers, low inflation and healthy GDP. Shouldn’t traders be focused on the fundamentals of the market cycle? Isn’t it just corporate earnings that ultimately drive stock prices higher or lower?

Model Performance:

Our trading programs have moved back to normal trading and cash levels, after having been holding higher levels of cash in challenging market conditions. And, we are sharing the performance of our proprietary trading models, as our readers have requested.

With regards to recent performance, it’s been an unusually tough spell for momentum trading as of late. But according to RiversHedge via AQR, the momentum/trend-following anomaly is likely to resume.

Controlling Risk:

In addition to increasing and decreasing cash levels depending on market conditions, we find that blending a trend-following/momentum model (Athena) with a mean reversion/dip-buying model (Holmes) is helpful in controlling risk; it 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.

And, since many clients combine the trading models with our long-term fundamental methods, they have additional diversity of methods without the need for short-term timing.

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.

Expert Picks From The Models:

Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.

Holmes: This week, I bought shares of Arrow Electronics (ARW). What do you think about that?

Blue Harbinger: Looking at your chart, I can see right off the bat that you bought the shares after a sharp price decline–which is consistent with your “dip-buying” trading strategy. Do these guys make electronics for China, and did the China tariff news cycle crush this stock?

Holmes: Nope, the market reacted negatively to a recent earnings announcement. My trading strategy is a little more nuanced than simply buying anything that dips. And no–I don’t place my trades based on anyone’s tweets–thank you very much.

BH: So you’re into fundamentals, and perhaps the actual market cycle? Here is some Fast Graph fundamental data that you may be familiar with.

Holmes: I am into fundamental data, but probably not in the way you think. My typical holding period is only around six weeks.

Road Runner: While Holmes tries to explain his strategy to you, I have a trade to share with our readers. This week I bought Boeing (BA).

BH: Wait? Why? I know you are a momentum trader so I am assuming you are trying to hop on the upward momentum following the market’s over reaction to a couple tragic airplane crashes that left the share price much lower than it should be?

Road Runner: That’s a great narrative Blue Harbinger. If you polish that story up a bit then maybe you can get an internship at CNBC for the summer. As I explain to you weekly, my trading strategy is objective and data driven. I like to buy stocks in the lower end of a rising channel.

BH: You’ve got a lot of spunk for a computer model, Road Runner. And I’m going to cut you a little slack because I see in that chart Boeing’s price is at the lower end of the channel, but are you sure it’s a rising channel? I like my narrative better than your explanation, but here is some fundamental data for you to consider.

Athena: I bought shares of Shopify (SHOP). I know you like that one, BH.

BH: It’s almost like you’re stalking me, Athena. Yes I do like that one. Shopify basically helps any business with a website become more profitable. Shopify helps with marketing, sales, product distribution, and all kinds of other things, depending on your needs. The company has been growing extremely fast, they have essentially no real competition, and the total addressable market is enormous which means they have a lot more room to grow over the long-term. Plus, that chart you shared doesn’t do this stock’s momentum justice. Check of the share price rise since 2015 (along with other fundamental data) in the following Fast Graph.

Athena: I am a technical trader. More specifically, I am an objective momentum trader, and I typically hold my positions for around 17 weeks. I am a “queen of the mountain” strategy where I utilize attractive qualities from across multiple strategies to determine what I hold in my concentrated portfolio, and I usually continue to hold it until something better comes along and knocks it out of the portfolio. So thanks for your subjective narrative, BH, but I’ll stick to my strategy.

Felix: I have a ranking to share. This week, I ran the stocks of the Russell 1000 (large caps) through my technical trading model, and my top 20 are ranked in the following list.

BH: I know you are a momentum trader, Felix. And I see Arcosa (ACA) at the top of your list. They manufacture and sell infrastructure-related products and services for the construction, energy, and transportation markets. If I didn’t already know you are a technical trading model, I’d say you’re a believer in this strong economy because you think industrials will keep doing well (ACA is an industrials stock). Thanks for sharing this list.

Oscar: I have some ETF rankings to share this week. As our resident sector/ETF rotation model, I ran our “Comprehensive and Diverse ETF Universe” through my model, and the top 20 are ranked in this list.


Whether you are a fundamental or technical trader, and whether you follow the news cycle or the market cycle, find a strategy that works for you. Some strategies may seem odd and/or unusual to you (some do to us too), but if you trade the same way as everyone else then you’re destined for average performance (or worse) compared to everyone else too. And of course, we’ll see how this week’s trade discussions with China work out, as well as how the news cycle and market react.

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. You can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

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