You have an edge over algos in trading counter-momentum news
The conventional wisdom out there among traders is that by the time you read a news headline, the algorithms have already priced it in. That's really not true, especially in cases where the news goes against strong upward momentum. The algorithms aren't going to place big bets against momentum. This is a case where you, as a human trader, have an edge over algorithms, because you're better at making predictions based on qualitative news reports that can't be neatly quantified and plugged into a forecasting model.
Look at how lumber futures responded to news that a federal judge had struck down the moratorium on evictions. (8 million renters are underwater on their rent to the tune of five and a half thousand dollars each, so this could put a lot of housing inventory on the market all at once.) Momentum weakened for a few days, but lumber continued upward. An increase in bond rates didn't stop the upward movement either. Only the next day, when the US dollar hit a support level, did lumber finally plummet. And even then, it rallied for a day before falling off a cliff again. Momentum doesn't die easily, but when it finally dies, it dies hard. (Note that Friday evening a federal judge agreed to let the eviction moratorium stay in effect while the government pursues an appeal, so we could see a short-term bottom this week-- but again, it could take a few days for the tide to turn.)
Let's look at another example. On February 7, 2020 it became absolutely clear to me just how bad Covid was going to be, and I pulled all my money out of the market. To my surprise, the S&P 500 just kept going up-- for nearly two weeks! In fact, I even bought a few shares on February 18, thinking, "I guess stocks just aren't going to react to this." Then I sold again on February 20 when it looked like the momentum finally might stall. And thank God I did, because what followed was a bloodbath like nothing I've witnessed before.
What I learned from this experience was that when you see a news event that ought to be an inflection point for a high-momentum security, you may need to exercise some patience. Short-dated puts aren't necessarily going to get the job done, because the price may not immediately react as you expect. But if you have the conviction and the patience and you choose your moment wisely, these sorts sorts of trades can offer big, big gains.
Look at how lumber futures responded to news that a federal judge had struck down the moratorium on evictions. (8 million renters are underwater on their rent to the tune of five and a half thousand dollars each, so this could put a lot of housing inventory on the market all at once.) Momentum weakened for a few days, but lumber continued upward. An increase in bond rates didn't stop the upward movement either. Only the next day, when the US dollar hit a support level, did lumber finally plummet. And even then, it rallied for a day before falling off a cliff again. Momentum doesn't die easily, but when it finally dies, it dies hard. (Note that Friday evening a federal judge agreed to let the eviction moratorium stay in effect while the government pursues an appeal, so we could see a short-term bottom this week-- but again, it could take a few days for the tide to turn.)
Let's look at another example. On February 7, 2020 it became absolutely clear to me just how bad Covid was going to be, and I pulled all my money out of the market. To my surprise, the S&P 500 just kept going up-- for nearly two weeks! In fact, I even bought a few shares on February 18, thinking, "I guess stocks just aren't going to react to this." Then I sold again on February 20 when it looked like the momentum finally might stall. And thank God I did, because what followed was a bloodbath like nothing I've witnessed before.
What I learned from this experience was that when you see a news event that ought to be an inflection point for a high-momentum security, you may need to exercise some patience. Short-dated puts aren't necessarily going to get the job done, because the price may not immediately react as you expect. But if you have the conviction and the patience and you choose your moment wisely, these sorts sorts of trades can offer big, big gains.
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