How do you trade the news, from takeovers to Fed decisions?
It’s easy to feel like the day’s headlines just make the investing landscape more muddled. How do you sort through the noise and turn the morning paper into profits?
The first thing you should do, every time a story breaks, is ask the question: is this news already priced into my stock, or is there still money to be made?
Guy Adami says when a story crosses that directly affects a stock he owns, he looks at what the stock has been doing leading up to the news story. Look at the P/E compared to the company’s competitors and look at the trading volume, he says. If there is big trading volume leading up to an event, chances are that people knew it was coming and there’s a lesser probability of a price change. Microsoft (MSFT) is a perfect example of this, Guy says. If you read their chart from July 2006 to January of this year, there was a huge run-up in the stock in anticipation of the Vista release. But the Vista news was already priced into MSFT shares, he says, and it was actually a great opportunity to sell. Big volume before a trade generally means the stock is less likely to get momentum out of the trade.
If the news is out there in the popular press, you aren’t going to get an edge, Jeff Macke says. But what’s more important is whether or not the news is viable. Companies make announcements all the time – they might move the stock temporarily, but not all announcements will affect earnings, which is the most important metric there is. Jeff says it’s important to know when not to trade. If you’re baffled or your positions aren’t working, take a step back, do some homework and reassess the situation. Sometimes the best trade you’ll have is the one you don’t make, he says.
For Tim Strazzini, it’s all about precedents. When a story comes out about a particular stock, he checks to see if other stocks have acted in the same way. Is the event or announcement directly relevant to core business of the company? On the peer level, how has it affected other stocks in industry? You need to know the answers to these questions before you act, he says.
Eric Bolling says because of the vast amounts of liquidity in the market, you can often still jump on board. There’s enough money chasing after a good story that, even if you’re a little late, you can still get in on the action. In today’s market, just because you feel late, it doesn’t always mean you are.
On APR 6, 2007, the day this show was recorded, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:
Bolling Owns (DIS), Gold, Silver
Strazzini Owns (VZ), (YHOO)