By the Time You Hear the News, It's Priced In

Order matters more than content. Information travels through a market in a fairly settled sequence, and by the time a piece of news arrives in front of an ordinary retail trader it has already done the whole of its work on the price, leaving the people who acted first with nothing to do except find somebody to sell to.

The clearest version of this arrives at a barbecue, from a relative who has heard something excellent about a company and wants to know whether they should be buying. By the time a story has travelled far enough to reach a garden in the middle of a Saturday afternoon, the part of it that was worth money has long since been collected by somebody else.

The chain

Start at the top. Insiders and the company know first, constrained by law. Analysts and institutions with research budgets know next, and they position accordingly. Fast money with data feeds and algorithms reacts inside seconds of any public release, financial media reports it inside minutes, newsletters and forums repeat it over the following hours, and social media amplifies the whole thing across a period of days.

Every stage buys. Each round pushes the price nearer to where the news says it belongs. So by the time the story has become a post in your feed with a rocket emoji on it, several rounds have already been absorbed, and what is left over is exit liquidity for the rounds that came earlier.

Suppose a stock reaches you through a message you never asked for. The question worth putting is who benefits from your buying it now. In most cases the answer is whoever bought before the message went out. There is no version of this story in which the tip arrives unasked and the recipient turns out to be the early one.

Why it feels like an opportunity

The chart is the problem. At the moment the news reaches you it looks superb: a strong move, heavy volume, a clean story running underneath. Everything that made the early buyers right is sitting there in plain view, and every bit of it is written in the past tense, because the move is simultaneously the evidence that the information was good and the evidence that it has now been used up.

A subtler trap sits behind that one. The news may well be genuinely good for the company. Good for the company and good to buy at a price that already reflects the news are separate propositions, and being right about the business while being wrong about the price is among the more common ways to lose money on a correct opinion.

An illustration

Consider a simple sequence. A stock gaps up sharply on a release and drifts higher the next morning. A trader buys the drift. Over the next fortnight the stock hands back most of the gap, and the news remains exactly as good as it was on the day it came out. Nothing about the company altered. The buying finished, and the trader happened to buy at the point where it finished.

The point generalises. A large move on news is a completed transfer from the people who knew to the people who heard, and the only question of any consequence is which of those two groups you happen to be standing in.

Handling information you got late

1. Look first at what the price did between the release and now. If the move has already happened, the information is in the price, and what you would be trading is the aftermath.
2. An unsolicited tip tells you about the sender rather than the stock. Somebody wanted you to buy. The penny stocks guide covers the version where that is the entire business model.
3. If the news genuinely changes your view of a company, put it on a list and wait for the chart to offer a setup, at a level, with a stop you can actually place. The story does not expire. The spike does.
4. Build the process on information that does not require you to be early: price structure, volume, your own risk rules. None of that depends on knowing something before everybody else, which is fortunate, since you will very rarely be the one who does.

The mirror image of all this, where stocks fall on good news that everybody had already expected, is the subject of buy the rumour, sell the news.