STP Algo Trader - Market Insights

One of the most challenging aspects of the stock market for less experienced investors to understand is the relationship of the "news" to stock prices.

In theory, it should be very straightforward.

When “bad” news happens for the economy or a stock, the expectation is that it should trade down. The worse the news, the more it should sell off.

As we have seen just this week, this is very much NOT the case.

In fact, sometimes the worst news can result in some of the biggest rallies in the stock market.

For most investors, this relationship can be both confusing and frustrating.

How does an investor determine when "bad" news is actually good and vice versa?

The simple answer is PRICE.

When we say price, what we mean is looking at the trends and technical situation of a stock (or the market) going into a particular news item.

The stock market does an incredible job of trading ahead of news events.

We don't think this is due to insider knowledge or trading but rather because most major market events or individual stock developments don't come out of nowhere. There is always some build-up.

We see many ways where PRICE is more critical than the "news."

One situation is when a problem is well-telegraphed. This weekend's bombing of Iran is a great example.

Sure, President Trump said loudly that he was giving Iran more time. But did anyone really believe him?

Here is a ten-day intraday chart of the S&P 500…

On the chart, you can see that the stock market began trading lower on June 11 and was down six out of eight trading days.

Here is a one-year chart of the S&P 500…

We have highlighted the recent sell-off on the chart. As you can see, it has not been severe, but the stock market has clearly been reacting to the potential for global volatility.

Another situation where the “news” isn’t as impactful as price is when we have a strong underlying trend.

Here is a chart of the S&P 500 going back to the start of this BULL MARKET back in late 2022…

This chart is actually amazing!

Considering all the volatility over the last few years – and especially since the beginning of the new Trump administration – the stock market has shown incredible resilience.

This is NOT something for traders and investors to ignore.

The most effective and profitable strategy for investors is to align with the existing trend. Predicting trend changes – while the trend remains firmly in place – is difficult and can cost investors a lot of money.

It is always best to let the price tell you when the trend has changed rather than trying to postulate.

When the market doesn’t react to the “news” like this week, it tells us even more about the market environment.

Over the past few months, we have commented on the remarkable strength of the stock market, as well as numerous powerful price action and breadth signals evident in the data. Many of these are historic in nature and point to a continuation of the BULL MARKET.

The reaction to this weekend’s event further reinforces this idea.

This week's price action has shown us both how the stock market predicts the "news" and also how the larger trend in price is the most critical variable in the stock market.

There is another example, though, when the “news” is less relevant than price.

That is when stocks are deeply oversold. This is the basis of our Signal Trader Pro algorithm.

When a stock gets to certain levels of short-term oversold, it almost doesn't matter what the "news" is that comes out in the near term.

As our readers know, we usually look for a stock to trade below a relative strength index or “RSI” below the 30 level and then trade back above it. This indicates both panic (trading below 30) and the beginnings of a recovery in sentiment.

One of the most essential lessons traders and investors can learn is to value PRICE over the "news." This lesson can not only save you many losses but also make you serious money!