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Even without a sophisticated method of measurement, there are many professional speculators who trade on the news. When a bullish news item or report is introduced and the market fails to respond upward, the experienced trader looks for a place to sell. it shows that expectations exceeded reality and prices had already anticipated the bullish interpretation of the news; there may be a large number of sellers above the market. Similarly, opening calls, available for most markets, are transmitted via wire services beginning about a half hour before the opening bell. Regardless of the means for determining the opening direction, an experienced trader may take advantage of a higher opening call to place a sell order. There are frequent cases of so many traders wanting to sell a higher opening that the influx of orders after a call, before the opening, has changed the direction from higher to sharply lower on the open.
Agricultural weather markets function purely on news. Traders with long positions wait for the 5day forecast hoping for no rain., they anticipate a loss of a specific number of bushels per acre for every dry day once the rainfall is below a given level. Weather markets are nervous and are characterized by evening-up on weekends., they rely heavily on anticipation and emotion. It is said that a farmer loses his crop three times each year: once for drought, once for disease, and once for frost. In 1976, the news carried numerous articles on the desperate wheat crop in the western states, showing films of virtually barren fields, and yet the United States harvested one of their largest wheat crops on record. Weather markets have a history of volatile anticipation but are a risky way of making long-term price predictions.
The discounting of news is as important as the news itself. An old saying in the market, “Buy the rumor, sell the fact,” implies that anticipation drives the price past the point where it would realistically adjust to news. When the actual figures are released, there is invariably an adjustment back to their proper level. The pattern of anticipation for each economic report or news event should be watched closely.
The problem of ranking and assigning values to news items requires a knowledge of how others see the news. Klein and Prestbo studied this problem for the stock market and concluded that about 90% of the Wall Street Journal readers perceived news in the same way (bullish, bearish, or neutral). The same relationship can be assumed for futures markets. A reason for the uniform interpretation of the news articles is the publicized analysis. Within minutes of the release of an economic report or Fed action, the wire services begin to quote independent and poll opinions of the meaning of the report, then transmit those interpretations over their news media to he relayed to most traders. The professional analysis is taken as correct, and later discussions based on that interpretation serve to solidify the opinion.
News can also be measured empirically, by studying the immediate impact of an expected or surprise news item. For statistical reports, such as the Producer Price Index, care must be taken to use the correct figures. Market reaction is a combination of expectations compared with actual figures, and corrections in the previous month’s data. in some months it is difficult to know whether the jump in prices was due to a downward revision of the previous month, or current values that are lower than expectations. When testing these factors, the historic data must include the actual numbers released in the reports, and a separate value for the revision of the previous month. Industry expectations are also important, but they can be determined empirically from the market’s reaction. Therefore, following the release of an economic report, we can expect the price change to he expressed as:
Price change =f(a(current value – expectations) + b(revision -previous value))
where a and b are weighting factors, a > b implying that the current value is more important than the previous one. It is necessary to make the assumption for this type of measurement that the effects of a news release are most important in the short term, and that their influence on the market is diluted daily.
Volume spikes are carefully watched because they are seen as a significant positive action by the traders. For a stock that has been relatively inactive, a volume spike is a warning that something is changing. In futures, a day of very high activity means that the market is sensitive to news. In both cases, a sharp increase in volume can be a predictor of change, or at least of higher volatility.
At this time it is worth remembering that a volume spike is a clear indicator of a positive action, while a volume drop can be ambiguous. Volume can decline because there is little interest in a stock or futures market; buying and selling pressure have been eliminated. When a currency, gold, or any traded product reaches a price that is considered fair (also called equilibrium), volume normally declines. Volume may also drop on the day before a holiday, or just by chance. While there are seasonal and other predictable patterns associated with volume drops, they are far less certain than large increases.