Chris Rowe

Why Watching the News Can Hurt Your Trading

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Some investors watch financial television or the latest headlines to find the "next big thing" for their portfolio. Others keep a close eye on company news or stock charts ... or both.

No doubt, you have your own set of "rules" when it comes to entering or exiting a position. Personally, I'm a big fan of technical analysis when it comes to adding new names to, or pruning slow-performing names from, my portfolio.

Opportunities present themselves to us every single day. It doesn't matter how they appear to us -- it's how we evaluate them before putting real money to work that matters.

The reason that most individual investors lose money in the market is because they invest in stocks, or withdraw from the market, based on what they hear in the news (whether they realize it or not), which is backward.

Stay Ahead of the Crowd

The internal market leads the external market. In fact, the order that things usually move in is:

1. Sentiment
2. Internal market
3. External market
4. Sentiment
5. And so on ...

It starts off with "the market" moving lower, and as we get to a low point, investors become more and more bearish and less and less bullish. 

But the fact is that when market sentiment gets to be excessively bearish, it's a contrary indicator -- meaning that it's actually a bullish sign. Remember, the sentiment is basically a reaction to what people see when they look at the external market.

The goal is to stay ahead of the crowd. So, I make it a point to clearly identify what's happening right now. 

When I see sentiment is way too bearish, I'm preparing to get more bullish by putting together a shopping list of bullish positions that I will take when I get the next signal, which comes from the internals.

Here's how the cycle works:

1. First the breadth of the market changes.

If we are talking about reversing higher from a low point, we would see a larger number of stocks moving up again as more and more stocks join that bullish party. We usually see this happen before the external market turns around and it becomes obvious to everyone else who mainly watches the external market.

2. The external market turns around.

At this point, individual investors and even professional investors are watching the S&P 500, Dow, Nasdaq, etc., to see if they break certain resistance levels or move above certain moving averages. What they're looking for is confirmation that the new market rally "has legs." 

This does make sense, and I do focus on that aspect, too. But, by this time, the internal market (if it's a real rally) would have already turned around. We already saw the sentiment indicators change, and we saw the internals change, so we are already confident in the move.

(NOTE: Everyone who sees a market bounce off of a double-bottom feels much more confident than when it made its first bounce.)

3. Sentiment changes. 

In this case, the sentiment will have already changed from excessively bearish (a bullish sign) to kind-of-bullish and kind-of-bearish. Eventually, people become more and more bullish until there is finally excessive bullishness. 

At this point, the cycle begins again as we take it as a warning sign to reduce bullish exposure.