Trading the News and the Economic Calendar
Updated: Jun 7
Stocks, currencies, and commodities all respond to news, both predicted and unexpected. Because you understand that trends will eventually revert to the mean, or back to the trend, you may be able to take advantage of unexpected news. The knee-jerk response of bad news may cause a sudden drop in a security. Often it’s an overreaction and the security will bounce back. But not always. Knowing the fundamental value of the security will help you know if a news-related dip is a buying opportunity or not. Understanding the underlying strength or weakness of a currency may guide your investment decisions during a surprising change.
Companies distribute reports and dividends on a calendar schedule. Options or CFD traders often trade before the news based on their estimate of the outcome. Volatility usually spikes before earnings reports. If the equity trades within the expected range, traders can capture that premium as the volatility drops after earnings.
Options Expiration Dates
If the stock market has made major changes, those who have shorted equities may need to cover those shorts. It can cause a temporary dip or rise in the equity price. In a similar way, index funds re-balance their portfolios on specific dates. This too, can affect the prices of those equities held within the index fund.
There are many dates where economic reports are delivered. Many of these reports are used to assess the health of the economy. Based on these measurements or statements, the market tries to predict how securities will move. Some of these in the US include (not ranked):
ISM Manufacturing and Non-Manufacturing
Consumer Price Index (CPI)
Federal Reserve Board minutes
House Pricing Index
Markit Manufacturing PMI
Producer Price Index
When nations report on their gross domestic production, their debt, employment, housing, manufacturing, import/export levels, consumer confidence, and more, investors gain understanding about the direction of the economy. As financial institutions comment on business trends such as inflation levels, interest rates, oil supplies, and cost of goods, traders adjust expectations for business growth.