Why investing off the news is a bad move

Don't be distracted by saturation coverage of events like the French election. Listen to the market instead.

  • By Michael Kahn,
  • Barron's
  • Investing in Stocks
  • Market Analysis
  • Stocks
  • Investing in Stocks
  • Market Analysis
  • Stocks
  • Investing in Stocks
  • Market Analysis
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

Don't make the mistake of reacting to each news story as it hits the wires. Markets always anticipate what will happen in the near future and move before the event. That's why it pays for investors to read the market's mood and ignore their Twitter feeds.

On Sunday, France voted centrist Emmanuel Macron to be its next president over the far-right Marine Le Pen. The French stock market had moved higher last week in anticipation. And Monday, the iShares MSCI France exchange-traded fund (EWQ) fell nearly 2%. It was a classic case of buying on the rumor and selling on the news (see Chart 1).

7 ways to tell if it's fake news

Here are a few tips to help you determine if you´re reading credible news.

Last month, right after the first round of the French elections, I wrote here that both the French market and the euro itself were trading at important resistance areas. Both inched higher since that time to make marginal upside breakouts, and then both backed down Monday.

Wasn't a Macron win supposed to remove the uncertainty that Le Pen was supposed to bring? Shouldn't markets have moved even higher on the news?

The French market and the euro both gained before the election and became technically overbought. They both show other technical signs that the bullishness of the past month is not sustainable, at least in the near term.

While neither suggests huge bearish moves are coming, the real lesson here is that this news is not really a factor in long-term trends. The French stock market was already in a bull market and after the election news and volatility die down, it seems likely to remain in one.

We think that the past few weeks will eventually be just a blip on the charts as both markets get back to their own agendas.

Recall that here at home, the pundits were calling for a stock market crash if Donald Trump was elected. Clearly, that did not happen, save for a temporary overnight plunge in the futures market. Had investors looked at the ensuing action in the market — from breadth to sector leadership — they would have seen just how wrong the experts were.

And now health care is back in the news, as the Senate takes up deliberations on the House's legislation. The popular view is that insurance and drug companies are making too much money and need to be reined in. Health care reform "should" hurt their stock prices, but one look at the chart of the Dow Jones Health Care Providers index (.DJUSHP), which tracks insurance companies and a smattering of diagnostic labs and care facilities, tells a very different story (see Chart 2).

The index plowed into all-time-high territory this year, slightly outperforming the Standard & Poor's 500 index (.SPX) since the election and enjoying strong inflows of cash, according to technical volume indicators.

We can understand how the medical equipment and supplies groups within the health-care sector are beating the market. Here, the potential removal of medical-device taxes should help companies within the groups. However, it is not as intuitive that a new health-care law will help insurance companies.

That is why a chart that illustrates the market's mood is so important. Fears concerning these stocks are not founded, at least not at this time. And should conditions change, it will be the charts, not the news, that tell us to change strategies.

We saw this dichotomy between news and markets in the United Kingdom shortly after the Brexit vote last June. An initial selloff gave way to a rally that is still in progress today. The iShares MSCI United Kingdom ETF (EWU) started this year with an upside breakout through a three-year trendline. So much for fears that the economy would suffer as businesses flee the U.K. for the European mainland.

Even in South Korea, as nuclear saber-rattling from North Korea ramps up, the iShares MSCI South Korea Capped ETF (EWY) continues to rally. (It is up more than 8% since the U.S. missile strike on Syria, which pundits called a warning to North Korean dictator Kim Jong-Un.)

It's not that an attack on South Korea wouldn't be bad news for the people there and the market, of course. The point is that the news changes all the time — but the market's own signals are much better at forecasting stock prices. For now, investors should keep with the themes I've covered here in the past few weeks, especially in technology, and don't let the news of the day be the reason you make investment decisions.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
Copyright © 2017 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.