How can we interpret the news?

[garilou]

I am used to see companies who's shares are going down produce many uninteresting news, like: Company xxx makes a donation to environment protection yyy. And the more the stock goes down, the more such "news" you receive.

They don't impress me much .(remember Shania Twain?).

But when you wait for a real new, like the financial results, the reaction of the market can be so mysterious!
Usually only "surprises" in financial results (as compared to analysts expectations) will drive a stock higher or lower, because the markets anticipate the results, and if the results show just what was expected, it might well go down, driven to high by its momentum.


Example:
On August 5, Marvel Entertainment (MVL - NYSE) announced (7:30 AM) pretty strong results for its second quarter:
Mean estimated were: $0.45 per share.
They reported  $0.59 per share which is usually considered a a huge "surprise".

Since I was short on it, I was getting prepareed to take a huge loss.

Well right at the opening, the stock lost about 1.50, and finished at its lowest level since mid-July, down $4.21!


But still an analyst wrote (at 10:30 AM)

Stock Movement

Shares of Marvel Entertainment are trading down by $2.92 or 8.28% at $32.34 on a volume of 814 thousand shares as the outlook fell short of expectations.
 
 
Maybe MTnews can explain that to us  if he ever read the posts in the forums.

Louise   

[DCA]

A couple of things I always keep in mind on earnings and 'news'.

1)  The earnings estimates are reported by the analysts.  The companies might provide 'guidance' to the analysts but it is in their interest to have any suprise be positive.  Statistically the analyst should be 50% high 50% low on any that they do not get right.  This is not the case.  The markets opinion of the earnings can be different and moves much faster than the estimates.  (Perhaps even because of news!)

2)  Almost every report that claims to explain a price movement is wrong.  It is easy to say that the price moved because of the earnings report after the fact but have you ever seen anyone publish a simple little equation corelating price to earnings prior to the earnings announcement?  So many other things might have shifted the price at the same time but reporters are a) lazy and b) like to pontificate.  (Perhaps the stock dropped because SSP issued a sell?)

Actually to seriously look at Marvel -- I would say that there was a lot of short term investment in it.  The good earnings then became an exit point for them and then the rush to the exits starting triggering those who think trailing stops are a good idea.

[garilou]

The earnings estimates are reported by the analysts. 

As a matter of fact they are not reported by analysts, they should be more or less precisely calculated from their own analysis of that company, even if the most honest ones admit that their "target" is partly determined by the company's own projection pr private chat when the analyst "visits" the company.

So I never trust analysts, especially when I read the fine fine prints that say what type of interests the analyst has in the stock.

Yes, it's kinda of easy to report or explain after the fact.
It is just a matter of keeping their job: they must say something.

But I heard one recently who - before the fact - was pretty accurate: he talked about the poor performance of the financial sector, where the effect of bad commercial papers seemed too big,  and predicted that when Oil and Gaz would go down, the financial sector would go up, and on the whole he was pretty right.

You wrote:

Actually to seriously look at Marvel -- I would say that there was a lot of short term investment in it. 

Well, this might just be a reporter-like guess.

My guess?

I think that more and more people rely on technical indicators.
The stock had regained since mid July, but on relatively low volumes, probably because of insiders talking too much about the good results coming soon.
But the stock was way over its 200 and 50 MAs, which are I think the most common indicators used. So yes, people took their short (or long) term profits, seeing only that the stock was largely overbought and not paying attention to the news.
Because whatever the analysts predictions were, this was a huge profit increase!

Since that day, the stock has gone up a little again, but on small volumes, so even if I am prepared to take a loss on my short, I hope it will go down a little bit more, (I was too greedy, and did not take my small 250$ gain that I had at a point) but on the long run, unless there is a actors strike, it will go back up eventually.

If we can't rely on the analysts, if we can't rely on the financial reports (the only interesting "news" I think apart - for very short term  - huge contracts announcements), what's left to make decisions?  (apart naturally from SSP's orders  .)
One of my exit strategies (it is not an investment startegy) is to sell as soon as either:
1. my gain per year equivalent is equal or more then 20% (unless the stock has absolutely no overheard resistance),
2. an acceptable gain goes down 3%.
3. a loss is between 3 and 6%, unless it pays a huge dividend.
Theoretically, because I reality I lack discipline. That is really my weakest point.
I am so much better to tell others when it's time : "Sell now!".

It is like horse training: I've always been better at training other peoples horses than my own  !

Louise

[garilou]

I started this topic, and it looks like if I was replying to my-self!
I guess this is because it is a question that has puzzled me for a long time!

I just found an interesting video, that could explain or answer the question I was asking.

http://www.elliottwave.com/club/protected/wave_principle/why.aspx   

I know this is a site that promotes a trading strategy, or better said, a trading decision making.

You need to register to go to the video, but the registration is free.

I am not sure I could be able to apply their principle, I find it looks simple on their examples, but I have yet to find out if I can see the patterns on real charts.

But this post is not really about Elliot Waves principles, it is mainly about this very interesting video on the relationship between news (not so much financial results from a specific stock although it could apply too), but general news, financial, political, wars and even natural disasters (like the Tsunami)

If anyone takes the time to go to that link, I'd be interested in your comments.
Thanks,

Louise

[bryanmcn]

I watched the video.
Very good !!
The contrarian view says that when a stock of the markets are at their peak, everyone who might buy has bought (think Northern Telecom).  So there is no one left but the sellers. So the stock drops.
When a stock is at the bottom, everyone has sold and believes that the stock will drop further so there is nothing but buyers left. The stock rises. There are exceptions. The markets took months to recover after 9/11. (It was a good buying op though).
But ...  I have found it difficult to distinguish the sub waves from the large waves in the Elliot Wave theory. Take a look at a chart of the TSX

http://stockcharts.com/h-sc/ui?s=XIU.TO&p=D&yr=0&mn=6&dy=0&id=p38505156141

Do you see the 5 waves leading up to the drop? Neither do I.

But do you see the triple top? That is a simple indicator along with head and shoulders and trend determination.

Right now it looks like the TSX is trying to base but it has formed a downward pointing "flag". Not a good sign. The DOW on the other hand looks to have reversed and is forming higher highs and higher lows since mid July.

http://stockcharts.com/h-sc/ui?s=DIA&p=D&yr=0&mn=6&dy=0&id=p38505156141

This is very short term, but isn't that our time span?

[garilou]

I'm happy you took the time to get there.
I think you deserve an applaud for this one 

Although the video seems convincing, in the practice I think that the Elliot Waves are very difficult to see: I have just started looking at that, but I doubt I'll ever use it to make a decision!
Maybe if we looked at 10 years charts!, but as you said:

<--snip-->very short term, but isn't that our time span? 

It is always easy (especially today when we do not have to burn our eyes on quotes pages of newspapers: I've done it you know, I not that young!    ) to find that one example that "makes your case"!
No, I found the video interesting for the relations between trends reversals and all types of events.

As I said when I started this post, I was short on MVL, and I was starting to loose, and then came those unexpected good financial results, I could not believe my eyes when I saw the stock loosing more then $4.00 in a day! (which would be another confirmation of the Elliot Waves theory!) And now, I'm just waiting, all indicators for MVL are on sell.


The link that you gave me for the DOW was wrong: it was for DIA (Diamonds)...

But still, if you look at the DOW (Weekly) chart,
http://stockcharts.com/h-sc/ui?s=$DJA&p=W&b=5&g=0&id=p83935179871
yes, it seems it is starting to reverse:

Higher volumes on upwards movements, lower volumes on downward movements. lows and highs in an upward direction.

This would sort of confirm what we saw in the video: when everything seems to go so bad in the US economy, the markets starts to go up (I hope not too fast because I am still short on a few stocks).

And as for the TSX, while all the news seemed to be still positive it was going steadily down, so now that the news seem less rosy, we might see a change in the trend we see now: let's give it another few weeks: (just enough for my shorts to be rewarding ).

You know what bryanmcn? You seem to be a experienced investor, I do not quite understand why you just get out when a market turns bearish, instead of going short.

I know you said you were not too much of a risk taker.
Every time I short, my broker sends me a message to click that I know that shorting is risky!

Supposedly, shorting is so dangerous, with such arguments as: if you buy a stock, the most you could loose is all what you've invested, but if you short, there is no limit to what you could loose!

I find this so stupid! Who would:

1. in a long position, keep it until one has lost every penny of his investment. (Unless when you are in a situation like Enron's employees who were not allowed to sell!)

2. in a short position, OK, you've got to watch somewhat more closely: but once they've started to move down, they do it so much faster are most stocks do when they go upwards!

The most important things to think is to find a stock with huge volumes, and if you can afford it, short pretty expensive stocks: then in a few days, maximum 14 to 21, you can cash an amount that does not seem so fantastic in $$$s but if you calculate the % return in EqPY, it's pretty good!

My first big gain with SSP was when they gave the order to sell IMN! Wow! It was the perfect stock to short! I shorted twice in a row, and it paid for repairs I had to do on my house  ! Thank you, SSP!

OK,this time it's me who's out of topic, sorry.

Louise

[garilou]

Just read:

One of the signs that a bear market is ending is when stocks no longer sell-off on bad news. That's usually understood to mean that whatever the bad news, it's priced into stocks. We're clearly no where near that point. 

I would add the co-related:
When stock do not keep their slight "buy-in" on good news.
And I mean real good news.

One a my newly discovered hint: when a stock is heading downward, you are infested with meaningless news coming from the company.
Like those one for TD:
"TD Canada Trust Wins Call Centre World Class Customer Satisfaction Award from SQM"
"This Saturday TD Canada Trust is throwing a big party at Simcoe and Conlin in Oshawa"

and right the next day:

"TD Canada Trust throws big party for its new neighbours in Oshawa"

For me this has become :
   a warning sign if I am long,
   a comforting sign if I am short, and
   a "don't buy" if I have no position!

So I stay short on TD!

Louise