Stocks Anticipate News Rather Than React to It

I OFTEN MAKE THE point that when it comes to allocating assets, the news, including a company's earnings report, is virtually useless. If you're trading based on a press release, then you're either in the poorhouse or well on your way.

That's because stocks, more than any other asset, have the uncanny ability to anticipate news rather than reflect it. Time after time I see examples of how a stock moves sharply in the months ahead of a major fundamental announcement, only to reverse once the news is finally out.

The best example can be seen in much beleaguered financials, which began weakening a year ago, long before the now widely publicized credit crisis was part of the American lexicon. Last summer, with no warning or fundamental justification, banks large and small began a slow deterioration, the magnitude of which wasn't fully realized until the first quarter of 2008.

Writing Was on the Wall

So when five or the biggest U.S. banks, names such as Regions Financial (RF), Suntrust Banks (STI) and Wachovia (WB) announced multibillion-dollar quarterly losses on Tuesday, their shares actually rose, with Fifth Third Bancorp (FITB) leaping 11%, Suntrust rising 16% and Wachovia soaring 27%. This surprised many investors who expected further declines based on the magnitude of the loan losses. Washington Mutual (WM), for example, had a net loss of $3.3 billion dollars, yet its stock was actually up 6%.

When a market is moving, many investors busily scour the blogs, headlines or research reports looking for a reason to explain the price action. What they fail to realize is that the story shows up in the market long before it shows up in the news. Being an informed investor has less to do with knowing why a stock is moving than it does knowing how it's moving. More often than not, by the time the news hits the front page, the move has already been made.

Picking Up the Carry Trade

Intrepid investors should consider a position in WisdomTree Dreyfus South African Rand (SZR), which I wrote about a few weeks back. Another carry trade idea I like is the Mexican peso, profiled in this space in May. The peso has recently notched a five-year high, with the CurrencyShares Mexican Peso ETF (FXM) still only trading about 10,000 shares a day. (I have positions in the peso ETF.) Hard to see the herd running wild just yet.

Also See:

Past Price Action Gives Glimpse of Stock's Future

South Africa's Rand Makes for Bold Trade

Market Action Confirms Mexican Peso Trade

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.