Investment Fundamentals - Is No News Good News?
It’s safe to say that the stock market has its share of clichés. Sayings like “run with the bulls” and “buy high, sell low” immediately come to mind as well as “buy on bad news, sell on good news”. Of the three, the last one seems to have the most pertinent information; it almost sounds right. But unless you are day trading stocks, you probably won’t get much help from it.
This particular saying does has an essence of truth; Wall Street news, both good and bad, tends to move the market. The thing to remember is that neither the market nor experienced traders listen to old sayings. Success in the stock market is the result of dedication and adherence to investment fundamentals, not oversimplified sayings. So let’s go back a look at both the saying and the concept of investment fundamentals.
“Buy on bad news, sell on good news” is completely rooted in the theory that market adjusts whenever there is big news. The truth is that the market does experience stock volatility based on global events; the catch is that these adjustments do not usually happen exactly when expected and they typically do not last long. For successful traders to take advantage of such movements they have to be prepared, and being prepared means working on your investment fundamentals. Investment fundamentals include charting, fundamental analysis of your target companies and technical analysis of their stock position. Sounds like we have a little work to do, so let’s get busy.
Anatomy of a Market Move
The market is going along, doing what the market does; for the sake of our example, it is on an upward trend. You have some available risk capital and you are ready to begin investing in the stock market. It’s time to put your investment fundamentals to work. You have been thinking about buying General Motors or investing in a small engineering company that is involved in the aerospace industry. Both companies look really good; GM just posted a nice quarterly profit and earnings estimates imply that they will turn the corner this year heading back to profitability. The engineering firm, MEW Industries, is still relatively small but analysts have been buzzing about their aerospace work and how it is going to pay off in the stock market.
You look over your stock portfolio and realize that you have enough long-term investing positions to stabilize your portfolio so you decide to move on MEW Industries. You have been using candlestick chart analysis for some time and the signals indicate that it is almost time to move. You are waiting and watching when “it” happens.
It’s all over the morning news; the Democrats have started a committee to look into allegations that companies are overcharging NASA. No specific company is named but every successful contractor is a suspect in the eyes of the media. Because of this even MEW Industries is mentioned. Suspicion mounts as the rumor mill grabs a tasty piece of political news.
As you would expect, the entire stock sector tumbles, taking MEW Industries with it. But this stock movement is different because you have been diligent with your investment fundamentals. You take a look at your research again just to be sure; there’s no doubt in your mind that this is only a temporary glitch and MEW Industries is primed to explode. With this in mind, you gladly take advantage of the temporary downturn feeling that you’ve just made a good deal.
The example above was intentionally created to parallel the cliché above; the investor bought on bad news but for the right reason. This trader (you) took the time to follow the investment fundamentals and do some research. When the opportunity came, your fundamental and technical analysis paid off and you were able to make a great purchase. Without using your investment fundamentals, you don’t know for sure if MEW Industries is having problems and is tempted to commit fraud against the government. Taking time to chart and analyze your investments before you make them gives you the courage to make deals based on investment fundamentals, not some cliché.