Profiting From The News

  • October 18, 2001
  • Peter Navarro
Peter
Navarro is a successful swing trader who trades using a methodology he
developed which identifies sharp moves in stocks that are triggered by
major events. When he’s not trading, Peter is
a business professor at the University of California-Irvine and the author of
the recent book “If It’s Raining in Brazil, Buy Starbucks: The
Investor’s Guide to News and Other Market-Moving Events.“ He holds a
Ph.D. in Economics from Harvard University and his articles have appeared in a
wide range of publications, from Barron’s and the Wall Street
Journal to the Harvard Business Review and the New York
Times.

Peter recently was a featured speaker at TradingMarket’s annual conference
in Las Vegas. He has developed a set of
innovative strategies on how to profit from the news.
In this article, Peter introduces us to the “Art of the Macroplay.”
Next week Peter will begin his regular schedule. You’ll read his commentary
and insights at 4:00 PM ET every Monday,
starting
on Oct.
22.

United
Airlines announces a bid to buy U.S. Air, an earthquake rocks Taiwan,
or rain breaks a drought in Brazil. Each
of these events will move stock prices in both obvious and subtle ways.
To understand these ways — and the “macroplays” they trigger — is
to open up exciting new avenues for your trading. But be careful!
To be truly successful, a macroplay must be a game of chess rather than
checkers.

Let me introduce you to the “art of the macroplay” with one of my favorites:

On May 23, 2000, United Airlines
(
UAL |
Quote |
Chart |
News |
PowerRating) announced a bid to acquire
U.S. Air
(
U |
Quote |
Chart |
News |
PowerRating).
How would you have traded on that news?

The “checkers” play would have been to try to short UAL and go long U.
In many cases, after acquisition bid, the proposed acquirer’s stock
price falls and the acquiree, in this case, U.S. Air, gets a healthy bump.

But here’s the trader’s problem:

Because of the “uptick rule,” you couldn’t lay your short on UAL quick
enough. Even more problematic, U gapped
up in a nanosecond after the news hit and, for a short time, trading was halted.
IF you tried
to go long after that gap up, you would have wound up buying at the top and
taken a bath as the stock fell off the gap. This
we see in the chart below. Note the
huge gap on heavy volume and the plummeting afterwards.



Of course, you might
think that the “chess” move here would have been to short the gap. Still, the better
move might have been to apply some “macroplay” thinking to the situation.

The airline industry is an “oligopoly,” dominated by a few large firms.
And news of this acquisition would send tremors through the major
competitors of United, most notably, American
(
AMR |
Quote |
Chart |
News |
PowerRating) and Delta
(
DAl |
Quote |
Chart |
News |
PowerRating).
In fact, the logical strategic response to United’s move would be for
these other carriers to look for acquisition targets of their own.

Doing your own research,
you would likely come to the conclusion — as American Airlines soon did —
that Northwest Airlines
(
NWAC |
Quote |
Chart |
News |
PowerRating) would be a likely target.
As soon you figured that out, you would have gone long Northwest Airlines
and waited. In this chart, you can see
what happened.

While Northwest got a
little bump after the merger announcement, the big bump didn’t come until 10
days later when American made its acquisition bid.
That’s when Northwest jumped 13.6, or $4 on the news.
Bang. You’re out with a nice
gain.

You
can read more about the art of the “macroplay” in Peter’s new book and
also find out why, “If It’s Raining in Brazil, Buy Starbucks.”
Available at Tradersgalleria.com.
Peter
would also like to hear about your favorite macroplay at https://www.peternavarro.com.