Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Trading with the News Flow
09/29/2011 4:00 pm EST
While many rely on technicals for finding trade set-ups, the markets are also very news- and sentiment-driven, and trader Jeff Greenblatt explains how to put the news flow on your side as well.
As a trader, you know that monitoring the news and the news flow is important to making decisions in the market. Our guest today is Jeff Greenblatt to talk about that.
So Jeff, what do you mean when you talk about the “psychology” of the news flow?
Thanks for having me. All anyone really has to do is pay attention to the sentiment that the media is portraying because they are interviewing all of the participants on the floor of the exchange. They reflect all of the headlines.
For instance, in the bear market of 2007-2009, the first thing that happened was a business slowdown. Everyone was aware of the fact that whether it was smoke and mirrors or not, we had just come off a severe case of euphoria.
What we heard in the early stages of that bear market was that the economy was coming in for a “soft landing.” When you hear talk of a “soft landing” coming off an extended prosperity period, they’re really saying “We hope it’s going to be a soft landing.”
Nobody really knows for sure, because at the end of the day, bull markets are a wall of worry, and bear markets slide down a slope of hope. So when you hear them talking about “soft landings,” and “things are contained,” nobody knows. They don’t have a crystal ball.
Likewise, when it goes from point A to point B and you finally get that fear that washes everything out at the end—like with Lehman and AIG, etc.—once markets started going up again, you didn’t hear talk about that anymore.
Now, every person that goes on television is talking about “Is it going to be a double dip,” and even as the market is rising, they worry about it every day. That’s your classic wall of worry.
Why this is very relevant right now is because for two years, we heard all this talk about a wall of worry, and since the banks topped in February, and the rest of the market topped in May, every business cycle is different, but what they’re talking about now is not the soft landing, but they’re talking about a “soft patch.”
So how do we make a trading decision around that? Do I take almost an opposite tact to what I’m hearing or the general sentiment? Or do I always understand that I need to kind of up it a little bit in terms of what they mean.
Well you don’t make any particular trade off of that information. You’re gong to use the technicals and you’re going to use the methodology that you have, but everybody is always curious to know, “Well, is it the end of the bull market, or is it a new bear market?”
You don’t need to know all of that, but what you need to understand is that the phase that we’re in is a reflection of what they’re talking about on TV.
When you hear them talking about soft patches and you’ve got markets that are coming off a high, you should be very defensive if you’re long, so you probably want to be covered with a put strategy.
If you’re a swing trader, you should consider taking short positions, because in the early stages of a correction, when they’re in denial, then the markets are probably going to go lower. That’s basically what’s happened.
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