Tuesday, June 14, 2011

Reaction to News

There are always expectations set on the results of a specific news event, whether economic or company specific, i.e., earnings. For the stock market, there is no such thing as good or bad news. There are three categories, actually. News can either meet, exceed, or fall short of expectations. The market can initially not react, react accordingly, under-react, or over-react. That initial reaction can reverse or continue. My permutation and combination knowledge is rusty, so correct me if I am wrong, but that makes for 24 combinations.(?)

Each of those 24 possibilities carries its own interpretative significance-- or insignificance. This is why it is vital even for a technical analyst to be very aware of the news.

Last week, I wrote that "I believe the market will react very strongly to any news that beats expectations and may even react strongly to in-line news, given the recent string of disappointments."

Above is a 5-minute bar chart of one day of after-hours trading on the September S&P futures contract. The most recent strong green bar with very high volume was a reaction to the scheduled retail sales economic news release. These were the results, courtesy of Econoday and Bloomberg:

One may consider today's news a beat because of the upward revisions to last month's figures, but more than anything, this is in-line news. However, the market reacted strongly, shooting up 5 points after already being up 9 points in after-hours. This is one piece of the puzzle. The final piece is whether sellers use this opportunity of higher prices to sell, reversing the reaction, or if buyers, including short-covering, dominate, continuing the reaction.

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