Does News Move a Share Price?

Well to a certain extent, this is like asking the question, ‘are swans white?’ (Yes, except when they are not!). It is also one of the hotly debated topics between the fundamentalists and the traders. The ‘fundies’ take the position that the quality of the company, its profit reports, its management statements, whether its directors are buying shares, its debt levels, the nature of the product itself etc. all have the ultimate bearing on the share price. They watch out for earnings reports and interim statements with great interest. They anticipate ‘news’ and long for ‘good news’ to give their chosen shares a boost.

It could be argued that their belief is supported in practice and certainly in theory. It is certainly a common sense approach. Most argue that investor sentiment drives a share price and when news is good, this in turn influences sentiment in a positive way, thus pushing share prices higher. The ‘herd’ then jump on the band wagon and continue to buy in as the share price rises, hoping that they can get in ‘before it is too late and the shares become too expensive.’

But are they right to believe this?

The Technical Analysis specialists (TAs or Chartists) believe that ‘news has nothing to do with a share price’. The only thing that will influence a share price is the price itself, and this in turn creates a pattern on the chart which in turn has a further influence on the share price. They argue that any news, good or bad, has already been anticipated by the chart, and whilst there may be a temporary spike or drop on news (some argue that even this is predicted by the chart), this is always extremely short-lived and has nothing to do with things really. This is why a company can move into profit, appoint a new and proven CEO, and announce a higher dividend and yet the share price does not budge.

It seems that the twain will never meet on these positions. If a share price rises sharply on news, the chartists will tell you that this was predicted anyway. If it does not move as fundies expected, the chartists will tell you that this proves the point that the news is irrelevant. This way, they will win both ways. When the fundies see a price rise on news, they challenge the chartists with the coincidence, but are told that it was not the news which moved the price, but investor sentiment alone.

The question of whether the News was necessary to switch the sentiment is often bandied about. However, again, chartists say that investors are not reacting to the news but the price. This is why it is often the case that after good news, the price actually drops down considerably (even without a short spike first). For fundies this is completely bizarre and makes no sense. Why would the price drop after a positive announcement? For a chartist, the pattern in the chart is indicative of human emotion and will follow an entirely predictable journey. They are then able to trade with some accuracy, and any news is entirely incidental.

The chartist position is one which philosophers would argue is entirely meaningless as it is untestable (the falsification principle demands that a position has a situation in which it could be proven incorrect for the statement to hold any cognitive meaning). It is self-supporting and circular, moving the goal posts with each counter-argument. If the price rises after good news, they argue it was already anticipated by the investors and had created a positive investor sentiment in advance, revealed by the chart. If the price drops after good news, they state that the news is irrelevant and that this is what they had always said anyway. When the contradictory nature of these two positions is pointed out, they remind the questioner that human emotion is fickle and that because of this ebb and flow in sentiment, we should expect to see such inconsistencies!

It is therefore a great piece of arguing from both positions, which particularly infuriates the fundies!

However, it can be said that there is some evidence that chartists’ patterns have some basis in fact. Traders are often much more successful than fundamentalists and seem to be able to buy in and sell out at much more appropriate times. They have little interest in the company itself and focus instead on the share price and the chart alone. Whilst this may seem counter-intuitive, it is nevertheless successful for the most skilled TA specialists.

What is my view? Well I love the charts and for trading this is certainly the way to go. Thinking that you can time a rise or fall from watching and waiting for ‘RNSs’ will only cause problems. However, for long-term buy and hold investing, you need to take a fundamentalist approach. Look at the board of directors, the profit margins, the dividend history etc. Invest regularly and this will enable you to average out over the various rises and falls in the market. Ignore the charts at your peril if you intend to buy in low and sell out at a high.

And one final thing – I would suggest that you steer clear of ‘buying to hold’ and ‘trading’ in the weeks of news announcements. Whatever is going on, and whatever is the root cause, there is definitely a short-term effect and some nasty surprises can happen around news time.

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