Don, I have read a lot of your work in Stocks & Commodities, blogs, and other places. You seem to have a pretty good handle on the nuances of stock trading. This question may seem off the wall. I watch news very closely. I rely on news to make my buying decisions almost exclusively, and would like your feedback on two things, axioms, basically. “Price precedes news” — how can that be? And “Buy on rumor, sell on news.” I don’t get it. I hope you understand my question. This really has me baffled. —From xttrader1982
First off, thanks for the nice words, and thanks for buying and reading S&C. There are many “axioms” in the trading world (for lack of a better term). Wikipedia states that in “traditional logic, an axiom or postulate is a proposition that is not proven or demonstrated but considered either to be self-evident or to define and delimit the realm of analysis. In other words, an axiom is a logical statement that is assumed to be true. Therefore, its truth is taken for granted, and serves as a starting point for deducing and inferring other (theory dependent) truths.”
Now to your basic question. If you listen for news items, and then check the price movement of the particular stock affected, you will often see the “prediction” of the news item. You may not know what the news will be, but you will be able to bet that it will be either good news or bad news, based on the direction of the price movement.
How can this happen? For a blatant example, I suggest you read the book Throw Them All Out by Peter Schweizer from which a November 2011 (I think) episode of the TV show 60 Minutes was produced. That book states that our elected officials in Congress are not subject to the same rules as the rest of us when it comes to insider information. In fact, these elected officials — both sides of the aisle — are exempt from inquiry into the very same information they are privy to.
Excerpt: “One of the biggest scandals in American politics is waiting to explode — the full story of the inside game in Washington shows how the permanent political class enriches itself at the expense of the rest of us. Insider trading is illegal on Wall Street, yet it is routine among members of Congress. Normal individuals cannot get in on IPOs at the asking price, but politicians do so routinely.”
I’m not going to place all the blame on Congress, and I want you to understand that the laws that are in place started out for good reason — to protect our legislators from false persecution. But these days, if they happen to be in a meeting that may provide military contracts to Boeing, for example, and they happen to mention it later at the dinner table, and the word gets out — virtually everyone is exempt from prosecution. This is outrageous! Especially when a corporate board member would be (or should be) jailed for this type of behavior. What if Congress were to hold meetings on a new tax for some sort of widget? Selling the stock of those widget manufacturers would likely start within 24 hours.
In summary, there are many ways that stock prices precede actual news, and this is just one example.
Now how about “Buy on rumor, sell on news.” Well, the rumor mill surrounding Wall Street is notorious, and despite the best efforts of regulators, many a rumor gets spread. Many traders are aware of this price action and know to dump the shares when the actual news hits the public.
Then there’s “No buyers at the bottom, no sellers at the top.” Imagine, if you will, either intraday or longer term, a price volume chart that shows smaller shares being offered (on the way up) — the buyers will stop buying when there are no larger sellers. A confirmed buyer does not want to run the stock up $5.00 to buy 500,000 shares. So if they see small offers, they simply stop buying and wait for larger sell orders, and the same thing happens on the downside, only reversed. All you newer traders should watch for this action.
Send me some other Wall Street terms you may have questions about — I’ll be glad to offer my thoughts.