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Most investors watch the financial news flow closely. There is plenty of news as companies report earnings, cut or boost profit estimates, announce new products, make acquisitions, change management, etc., etc., etc.
I know one elderly investor who watches the stock market news very closely all day, and I am surprised, when I speak with her, that she will tell me this or that about a company. However, she has one fault that many average investors have and that is trying to buy stocks off news without checking the technical action of the stock.
That is like trying to fly a plane through fog without an instrument panel. If you try to use your eyes (common sense), you can easily get lost. You have to look at the panel (technicals and tape) and fly by that. As any seasoned investor knows, the stock market often "discounts" news in advance. That means, often, the price of the stock has already been factored into the news development, sometimes, days or even weeks before. There are only certain news items that are really "hot stuff."
The key is: The news is not the news, but the way a stock "reacts"
to the news.
The emotions of savvy investors stay intact when they see important news that might affect a stock. They may (1) move quickly, (2) move not at all or (3) wait to see what develops. eSignal subscribers can discern the reaction of a stock to news by looking at the price action on a stock chart and by studying the tape action at the time of the news announcement. eSignal provides great tools for this with its time and sales report and intraday and long-term charts.
A basic guideline one can follow is this: When news comes -- say it is bullish -- check, first, a-one year chart on the stock. That way, you can see if the stock has moved up in price days or even weeks before the news. If so, be careful. Some "smart money" may have already moved.
I spoke with one analyst who told me about a certain firm -- not to be named here -- that came out with extremely positive news, and the stock traded heavy volume. Later, it was disclosed that the CEO of the firm, who was a big owner of the stock, was selling heavily into the news. The stock fell some 30% afterward.
Second, check an intraday (5-minute to 30-minute) chart going back approximately three or four days to see if there was any unusual buying or selling. You can do that by considering the volume and price action. If the stock rose or fell on big volume intraday, it is telling you something. Finally, when the news comes out, watch the tape closely to see how big blocks are trading.
Let's take a look at recent potential "news play," Spectralink Corp. (SLNK). The firm, a maker of wireless, on-site telephone systems, said that earnings for the fourth quarter of 2004 would be 20 cents a share. That topped by a wide margin the 14-cents-a-share consensus forecast and the highest estimate on the Street of 16 cents a share. In the year-ago period, SLNK earned 13 cents a share.
Was the news a genuine surprise that could propel the stock even higher? Well, if one checked SLNK's chart of the previous two months, it was trending sideways and not showing much of anything. Second, the trading in the stock the previous three days was subdued.
Finally, the tape action showed a strange twist. SLNK traded 2.4 million shares, well over its daily average of 150,000 shares. The big block activity in the stock was very interesting.
The significant block trades in SLNK showed heavy selling just after the earnings news with three blocks, 19,657, 20,000 and 10,000 shares, all going off at a price below the bid. That would indicate clear distribution into the news. Thus, bearish. The blocks went off around $15.30.
However, later in the session, the stock continued higher, peaking at $17.70, before closing at 16.75. Instead of more big block distribution, there was big block accumulation with blocks of 16,100 shares and 25,000 going off at a price above the ask.
The news triggered an earnings upgrading by JP Morgan and a buy recommendation from Raymond James. Putting it together, it would appear that, in this case, SLNK's news is bullish. And, to step out on a limb, one would say the stock has a chance of moving higher in coming weeks, all things remaining equal.
So, the lesson is that all news on a stock should be put through the litmus test of seeing how it fits into the technical and tape action. The idea is to be able to exploit, in a profitable way, important news, and avoid discounted news.
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