Is the News Already in the Price?

A common mantra for a technical analyst is that the news is indeed already in the price. This seems a little too simplistic. While there are times when price instantly adjusts to new information, this normally occurs when the market is fully aware of relevant economic or statistical information being released. The sheer volume of statistics in recent years can be debilitating and lead to paralysis for anyone who wants to hedge and hold positions over days and weeks. The risk is that you can be buffeted around by short-term volatility, which I feel has worsened in the past year as high frequency algorithmic traders chase each other’s tails and volume. I think of them as demonic hamsters running around a wheel, ever faster and faster.

Here are a few rules I follow with regard to the news:

A market cannot truly trend until it has all the day’s statistics

This means that on high statistic days, I have to lower my time horizon, both in terms of the timeframe chart I’m using and how long I can expect a portion of the trade to last.

Unexpected news events are not already in the price, and lead to fear that other unexpected news events will occur

The Middle East and the credit crisis are obvious examples, demonstrating how price can trend far more aggressively and further than most participants anticipate. Established mantras concerning what constitutes overbought or oversold will fail miserably. The market can stay irrational far longer than you can remain solvent using those inherently flawed methods.

It’s not what the actual number is

It’s what it was expected to be, and what the actual number is in relation to that number. Also, what was the price action ahead of the number and what was the instant reaction when it was released? I’m primarily interested in good news and bad action or bad news and good action. This activity confirms that the news event was actually irrelevant and the market already knows what it wants to do.

The same story being repeated does not mean that the reaction will be the same

The market has a very short attention span, and this manifests itself in two basic forms:

  1. Last year’s ongoing European credit market woes saw the eurodollar fall throughout the development of the Greece story. When Ireland suffered a similar fate, the eurodollar rose sharply in the immediate aftermath. How can this be? In this instance, with knowledge of eurozone problems existing for months, the story was already reflected in the price and so anyone who believed the story to be bearish was already short. When the initial first day reaction downwards was swiftly rejected the following day, they were forced to buy back these sell positions, which then encouraged new participants to get long.
  2. Simple news fatigue is the other cause of a different reaction to the same story. This was evident when Portugal received its bailout. The market hardly reacted at all.

This leads to me to the two most important rules:

  1. The chart tells me; I don’t tell the chart.
  2. The market comes to me; I don’t go to the market.

This past week has seen the eurodollar extend its gains and break the 1.4556 point mentioned previously. The Federal Open Market Committee (FOMC) statement was treated as dovish by the market, although I noted the mentioning of rate hike rhetoric if inflation rises further. The market chose to ignore this.

The next major target of resistance is at 1.5136, with all eyes focused on Friday’s Non-farm Payroll number. Next week we will look at how the timing of the payroll release coinciding with CME currency option expiry can provide low risk hedging opportunities.

Figure 1: Daily Eurodollar Chart May 2010 to April 2011

Source: CQG


Related reading

Mark Carney Bank of England