News significance in small-cap stocks
It is fair to say that majority of those interested in trading or investing in the small-cap sector of equity markets start their journey by reading the news releases, and making sense of market moves based on what was said either in news articles or what someone else out there told us to think of it. This makes the sector especially in earlier stages very story-driven, and as well highly subjective because after all everyone can be their interpreter of the story with a different conclusion.
The game of investing or trading can be sometimes quite dull. News and stories make it less so as they add some soul to the market and companies. And since objectivity is not a priority of many that deal with markets, it is not rare to see that people seek excitement out of the news stories and find this as an interesting way to approach their investing or trading thesis, regardless of the results shown up or not at least on a short term basis.
Additionally, news since often is either bullish or bearish inclined helps investors or traders to put a firmer thesis into assets direction. However, the reality is that most of this is just oversimplification and safety in making sense out of a situation which does not necessarily improve the edge of the participant. Just because something makes sense, it does not mean the edge on figuring out the direction of asset increases as well.
What this article will focus on are some of the subtopics of news releases, and how stories in small-cap equities might not be as important as you think, at least not for short-term trading directions. Or if they are in many cases building a good accurate thesis of the story itself that reflects through price moves can be quite a more challenging task than many might make it who get obsessed with reading or interpreting stories. One of the conclusions of the article itself will be that stories can be a great sunk hole of wasted time when it comes to extracting edge in smallcap sector niche. If entertainment is your primary reason for why dealing with markets in the first place, then perhaps you shouldn't even bother with reading further, but if edge plays a role much more, there are certain things to be highlighted.
So the question to answer is: To read, or not to read? The news I mean. Is it worth spending only a little time reading the catalysts and what the value of that is, versus doing in-depth research on the particular company and their news many times over and over again and as another example not reading the news at all when trading or investing in smallcaps? What is there a difference in results between the three? Can a detail-oriented well research individual heavily outperform someone who has no clue or doesn't even bother reading news catalysts, especially when trading but also investing in small-caps? And where is the cut-off, how good and objective do you have to be on reading the news where it starts to translate in edge clearly, and is it worth it massaging this skill, or are there better areas in smallcap trading/investing that could be improved before that to impact edge quicker?
Strong news-selloff, weak news-rally, and context defines relativety
Often strongest news can result in a complete selloff (OCGN vaccine approval in November 2021) and the weakest news can result in the strongest rallies (2022 March bounce of equities on Rus/Ukr invasion). What truly matters more is context, more than the news itself at least.
OCGN on the left and SPY on the right.
The context of momentum and cycle flows
It just makes common sense that market moves and their rationale should be found within the stories, the news that is. What this article will touch upon, is that underlying causes of moves can be very disconnected from the news itself, its significance, and especially the consistency. The market will often react to the same type of catalyst with a different type of move, not just slightly different, but significantly. This leads to the fact, that underlying variables are more layered, and what in reality matters, is what context the news is placed into. The context quality will dictate how the market might absorb the news and for long the aftertaste might last. Understanding that context is absolute key.
For example, there are macro conditions in the market present where "money" is very irrational and chasing behavior faced. This might be called the strong cycle. In such a market news will be over-rationalized on the bullish side, and is also likely to deliver a more likely stronger upside move.
And when market conditions enter into a colder and more fearful state-the weak cycle, the opposite will be true. The news is more likely to be downplayed in such case, its bullishness degraded.
This leads to the fact that overall cycle flows and momentum conditions present in the market (chasing vs scared money) have a major effect on what the ticker might do once a particular X news release hits. We are talking here about comparing the same type (or very similar) of news catalyst and potential differences to price reactions that could happen, due to the different context/environment it is placed into.
This might seem a very obvious highlight, but it is absolutely overlooked by many market participants, the basic weighting approach to news significance, based on current present context:
What the image above highlights is that there could be a significant difference in price reaction to a similar (or exactly the same) type of catalysts if market conditions are very different for each case. This is absolutely critical to understand because whenever someone tells you that there is a method out there to read and interpret news well in small caps to pick the direction of the ticker is most likely either half of the truth only or just direct deception. That especially if sloppyness is not acceptable. If we were to define tickers reaction at max range of X % with Y catalyst and only allow for the smaller discrepancy in performance, but without taking market conditions (cycles) into address, most likely the "news reading method" would fail. In other words, its consistency in the performance of matching the ticker's behavior criteria would fall short of randomness. It would not outperform randomness by much.
Whenever you are testing anyone's thesis, methods or views always perform the test of randomness overperformance as that will highlight whether there is value to the method or not. There are many methods out there, that are just distractions but delivery is completely in line with flipping a coin. Just a there is SPY outperformance test for a hedge fund to managers to see who has or does not have the right skills or methods, there is similar such test to anything in markets really on thesis side, the randomness outperformance.
Validation / invalidation test
The SPY outperformance test can show you which hedge fund CEO or his/her team has credible insight with value, versus those whose words are no better than flipping a coin on it.
Any indicator or news reading method in markets can be tested with a similar method of randomness outperformance, meaning if the method is tested under two very different market conditions, does it fail and return completely noisy results? Because if so, it is under-defined and there are critical missing pieces to it, that have to be addressed. It is always the same kind of returned answer no matter what the method is. If it cannot outperform in both bear and bull markets, and those reasons are not clearly defined why that is, there are either missing pieces to it, or it could be a very much a theoretical nonsense.
That is why many news interpreters (small-cap social media) with bullish bias in markets look like geniuses in strong cycles but also get it wrong every time in weak cycles. The methods of justifying the news and its impact on price are just not defined within realistic boundaries as cycle conditions contribution is not addressed, which leads to the fact that people tend to blind themselves with how good they are at interpreting the news if they don't fully understand just how much the market momentum and recent markets behavior contributes to pushing tickers to certain prices after news hits.
Therefore before we dissect news, traders or investors should understand well how strong current market conditions are, as that will determine whether one should be highly skeptical of the news and seek for weaknesses in news articles, or the opposite of that, being so dismissive that reading the news article is almost no point because if market momentum is excessively strong chances are that least on an intraday basis for that same day it won't matter much.
Gap-and-fade behavior without market conditions context in smallcaps
To stretch this point with another example, this is why traders who often look at tickers' historical gap and fade or gap and rally behavior tend to miss the fact that most of those historical market conditions were likely weak in 60+% cases (statistically that is true), where each gap (news release) has happened. Either weak, or neutral, but less likely to be strong, because strong cycles are rare.
So traders like that get often caught in surprise when they use this method to anticipate what ticker will do on the current day, while not acknowledging the fact market is currently very strong and the gap-fade behavior on this day might completely inverse from what is expected historically. It's by this where short-sellers tend to get burned the easiest. It is why understanding past cycle context vs current one is absolute key. And the same goes for long investors, they get trapped in the next gap ups anticipating the ticker will run this time just as much as it did on the last 500% rally, without understanding that current cycle conditions are far weaker and is just most likely not going to happen. That's how many longs get trapped into bagged positions. And this becomes especially when news are added into mix because people will build even stronger biases after reading a love story around their traded asset. It increases blindness.
It is well worth acknowledging something: Smallcap stock cycles shift very often, and many market participants do not even recognize the shift when it happens realtime. For many it might take two weeks before reality sets in, especially beginners.
The quicker the market cycles shift in asset class the more surprised and caught off guard everyone will be because it takes higher adaptivity skills to recognize it ahead or realtime. That is why for example studying news effects on assets is much better done in crypto markets rather than small-caps because crypto cycles tend to last a year or two in the cohesive singular cycle, while small-caps tend to flip flop from strong to weaker cycles all within just two months. to strengthen all the points made above in the article therefore it is highly suggested for one to study crypto markets in bull cycles and bear cycles on similar news to see how much price reaction can be on pretty much the same catalysts. The same concept will then apply to small caps but like said, small caps are not the best training ground to learn this concept well, it's more challenging.
Example of crypto news catalyst in bull vs bear market, on same type of news release and price action differences:
The same concept as above applies to small-cap stocks, it's just that those shifts between cycles are more challenging to see for many participants and therefore crypto was used as a cleaner example.
If you asked random market participants at random times probably a good amount of them would be able to tell if crypto is in the strong or weak cycle. Asking the same for small-caps and you are much less likely to get any cohesive numbers, it would be a mess. Due to the much shorter duration of cycles, the read is more difficult.
For example, this is news catalyst on smallcap stock in strong cycle on the image above and its reaction,while lower image shows similar news catalyst in significantly weaker overall market and the reaction of ticker to this news:
Types of catalysts in smallcap market:
-revenue increase news (capital increasing)
-Biotech research phases (capital draining)
-sector flopping (capital draining)
-lawsuits (capital draining)
-offerings and dilution (capital increasing but value draining long term)
-partnerships (often capital and value increasing)
-acquisitions (capital increasing)
-new product sales agreements (capital increasing)
For the sake of simplicity the green ones are highlighted as perceived as bullish on a plain surface and the red ones bearish. However, that is all only in a vacuum where no context impacts the news, where the context itself might divert the bearishness or bullishness of each highlighted catalyst above, or the price direction in short term. This means that the basic interpretation structure of news can be shifted if a certain context is present.
One of the common mistakes made is that traders or investors think of particular news catalysts always as static defined. For example offering=always bad. The new sales agreement=always good.
Instead one has to be adaptive, and always think of what is the current context. It also helps to have news split in each cycle (strong vs weak cycle) and see how the tickers like to behave in each for that particular similar news catalyst. That is one of the best ways to remove the foggy misunderstanding of how much news or cycle itself actually contributes to the tickers direction.
Another route is having tickers split into recent themes, where if particular X news has hit a previous ticker it might be used as a guide for the current one partially, regardless of how much it made sense because chances of replicating that move are a bit high. For example, even if it did not make sense from one's perspective why the ticker reacted bearishly to the (self) perceived bullish catalyst, one should pay attention to that end-resulting price because if the current ticker is under the same catalyst, the chances of being influenced on its behavior are higher.
Getting rid of common sense judgment, and understanding the context and replications is much more important than "what does and doesn't make sense". When something doesn't make sense to you it's most likely that some key pieces of the puzzle are missed from context, rather than the "market being weird about it".
This means the context can change the news weight from one side to another. Not just that it can decrease the bearishness from a score of "very bearish" to "mildly bearish" but it can turn something from "bearish" into "bullish", at least on a short-term basis. Mind that we are specifically talking about short-term price reactions to such catalysts and not 1 or 2 months plus time durations.
When negative news catalyst turns bullish
For example, let's give a dilution news release with an offering as an example. The basic guide might tell you that catalysts such as this should be bearish as it creates a more fresh supply of stock units, which in itself might overpower the demand and push the price lower. However, there can be a big disconnect between theoretical explanation versus real results on price action, both of which can differ (common sense is bearish but price reaction might be bullish for example).
MDR offering news in weak or strong cycle:
Mind that different contexts can impact the price behavior in short term quite a lot. Those differences are if the ticker is 1. MDR (multiday runner) and if it trades on a 2. very high volume, it is more likely to reclaim the offering catalyst and squeeze. The fresh supply added from dilution will not be as high as the daily demand for ticker is (for whatever reason) and demand might easily absorb the freshly added supply from offering. That is why it is not that rare to see in stronger cycles tickers that were on a sustained multi-day rally to reclaim offerings and head higher after such a negative news release.
For example, a multiday runner could trade 50 million shares of daily volume, but if a freshly added offering only contributes 15 million shares, that would not be enough to prevent the ticker to rally further. It is always good idea to check the offering size or shelf size and compare to currently traded daily volumes as a starting point. And sometimes even dry low volume multiday runners will still absorb the offering and move higher, for some other reasons.
Example of offering with reclaim of price in MDR ticker of CYN on the image below. This ticker was not in the particularly strong cycle as its volumes were not that high relative to offering size, yet it still managed to reclaim and push the negative catalyst out of its way.
Usecase of news catalyst (anticipation vs reaction)
To stay on the topic of offerings and dilution news, let's take another example of dilution on a multiday unwinding ticker where the news hit on the backside. Understanding the structure of news catalysts is often not good enough if one doesn't have a good enough plan to put it into use. If something is quite obvious about the company and news might be somewhat anticipated by many participants it might be the case that to execute on a news catalyst trader or investor has to front-run the news before it hits, else for different reasons the play might be gone.
There is often a large difference in the understanding news catalyst in hindsight versus anticipating it ahead and correctly forming expectations on price move. Those two concepts can be night and day different in difficulty and practicality of execution.
An example on the image under is PSTV which has a significant history of executing the dilutions and running the stock price into the ground, but if one was to execute a short position based on news purely it would have to be anticipated ahead. It also shows the complete difference in short-mid term performance of stock versus the above example of the multiday runner with offering delivery on CYN.
This is just to quickly highlight two different price reactions on seemingly similar catalysts, but the context made price reactions very different in each CYN and PSTV. There are many more examples to give but for sake of concluding on this point let's just highlight a few key points that one should be aware of when it comes to dilution or offering news in general to anticipate assets price direction short term:
Strong cycles can absorb offerings more easily. The offering impact might be negated quicker. It is not unusual to see ticker reclaim and squeeze in such conditions. Weak cycles are much more proned to delivering hammering to tickers price, it is less likely to recover in such case.
-Recent theme (reclaim/no-reclaim):
If recent offering tickers were strong faders, chances for the next one to do the same are higher. And vice versa if opposite the case (usually in strong cycles only).
-Multiday runners versus day 1 plays (MDR/day1):
Multiday runners have a higher chance of absorbing the offering and squeezing again, meanwhile, day1 plays or day2s have a higher chance of not recovering after the offering price. So pay attention to what category the ticker belongs into.
Significance of freshness (buy the rumor sell the news)
It is particularly important to understand the aspect of the freshness of news catalysts. If the ticker is a day 1 gapper that might be as important, because whatever the reaction is going to be likely fresh and un-digested. But it's especially on multiday runners (or decliners) where one should be careful about news catalysts because they might be baked into the price.
Such an example might be when a lawsuit is confirmed on a ticker that was under multiday unwind and the ticker reacts bullishly because the news catalyst was already plenty discussed on different media sources and the company itself weeks ahead before it was delivered. Therefore market has been pricing it ahead. Lawsuits when delivered fresh (no prior history of it being signaled ahead) on multiday running ticker can be very negative, however, because it will be strong counterforce set against ticker that is extended on the upside, therefore delivery of reject move with a selloff is more likely.
We can identify again that particular context can impact if the ticker should react bullish or bearish to the catalyst, depending on if it was priced in ahead, and in what kind of move the ticker was a few days or weeks before the catalyst announcement.
Another example of freshness is the OCGN example in small caps given above in the article. When the catalyst is very much anticipated and constantly mentioned in news (before actual release), it is likely that it has been priced in, if price action has been in rally (if bullish) or selloff (if bearish catalyst) ahead of it. That is a key component to watch for as it can determine whether the current catalyst should be played on its surface value (bullish or bearish) or should be played as "buy the rumor sell the news event".
It is important to add that a large portion of small-cap catalysts will typically be non-anticipated, more out of the blue for the majority of participants. But some of them that might not be the case, and those might be the best trades. Buy the rumor sell the news type of catalyst might provide to be much clearer opportunities compared to the spontaneous surprising news releases, especially if the ticker has been pricing in that catalyst clearly in a strong price move.
A typical checklist procedure of trade on "buy the rumor sell the news event" is outlined on the image above for OCGN, those are key factors personally used, but one could probably find other ones in different niche too.
The key highlight of OCGN above is, that for beginner traders or investors this is the most frequent trap they step in, seeing a very strong ticker with an anticipated bullish catalyst which creates a lot of excitement and lures them into a long position on confirmed release, but the price action completely tanks and leaves everyone speechless. It is therefore important to be always aware of whether the news might have been priced in. There is no guarantee to knowing that, but there is a checklist that helps to establish if the chances for that are high or low. So avoid longing if chances are high, and consider short instead (buy the rumor sell the news play). This especially applies to multiday runners.
Negative catalyst in the strong cycle? Does it matter?
To use the example of capital draining + positive prospects release of biotech phase 1 or 2 or 3 news can be quite unimpressive to the market in general unless the company is developing a very non-competitive drug/product with a huge market. Let's say that this isn't the case for a large portion of biotech companies, which unless the results of phase 1 or 2 testing stages for such drug or product are exceptionally good (which again in most cases won't be), it is likely the market won't be too impressed with it. Those kinds of catalysts are especially frequent traps for investors who seek excitement in this field. Biotech research products and stages can be quite exciting and it is easy to get blinded by the positives of such stories while neglecting the negatives.
In each stage biotech companies have to burn a large amount of capital to move from phase 1 to phase 2 and then to phase 3 after which the failure rate is still quite high before the FDA approval is passed. This leads to fact that the news catalyst of such is a very mixed story in itself, because even though on the surface it seems like a bullish catalyst, the hidden variables might not make it so in the mid-term. Especially if the company is low on cash and has a high burn rate, the reality will have to be priced in that dilution might not be too far away from where the phase 1/2/3 news has been released. And dilution will likely offset all the positive price impact from phase 1/2 or 3 news release.
Because of those factors (mixed factors but on capital side still burning, therefore negative), it is not surprising to see that under weak cycles of small-caps when momentum is very cold, this catalyst often delivers some pre-market gap that sooner or later ends with fade, typically quite a strong fade.
But on other hand, that same type of catalyst can also result in a very significant rally every once in a while, when market cycle conditions are very strong. This leads to a complete flip of price delivery because if the market is ignorant enough to negative factors and "buy mode" is activated, just any negative factors of such news might be ignored, and that even counts for market makers, not just retail. It is not rare to see in strong cycles that the market might just bid up any such mixed catalyst. This changes the performance of news releases quite a lot, and it again strengthens the need to be aware of current context.
This leads to the fact, that there is no such thing as a high % reliability framework for defining the direction of the assets based on just reading the news. The context can significantly alter the chances of where the ticker might go after a similar type of news is delivered again and again. Without addressing context (cycle momentum strength, recent themes, companies capital structure, etc) the news becomes just an attention-grabbing mechanism to which beginners in this market niche like to flock because it is exciting. If you have not understood the significance of this you are likely wasting plenty of time by over-reading the news. Not to say that there is no value in doing proper homework on news catalyst, not at all. It is just that, outside context should be given always connectivity addressing too so that efficiency is improved.
Edge application of catalyst versus oversimplification
Typically the news is not too difficult to comprehend, it is the lack of selectivity and testing that makes all the difference. Many will never bother checking and running some simple tests on how well one particular catalyst performs if one just buys or shorts the ticker after catalyst release. Or what is the mid-term price direction on average after a specific catalyst release? Either such tests are never performed, or the conclusions are well...non-conclusive. Noisy. And that is normal, it is because only the right context highlights how the better set of behavioral catalyst data should be applied and where it should be avoided.
For any beginner investor, it is highly suggested that you test the catalyst impact on asset class (historical backtest) before any actions are actually deployed. Collecting 100 samples with similar catalysts, and checking the average behavior is a good starting point. It will pour clear wine into the glass as we like to say in our country. It won't provide you often a clear edge, but at least it will divert focus on oversimplifying just how easy it is to make directional conclusions in trading or investing based on one particular news event. So the starting point is that there is no easy starting ground, then move forward from there. Next should be defining the context better, to know under which circumstances X news catalyst might be used as part of the edge and directional bias and in which cases not when context and news just are too much at the crossover (bullish vs bearish conditions).
Reverse split pump long/short example
For example, while there is a very common view out there that reverse splits in small caps provide good investing opportunities or long opportunities as sooner or later this kind of tickers tend to be pumped, the reality is the data is not very consistent on that side. Sure it makes sense if the company reduces the float it takes less buying power for market makers or pumpers to bring tickers higher, but the reality is those tickers often are not being touched for a long time after the reverse split takes place. So the timing window could be very large. There could be large timing disconnect between what makes sense versus what the reality is. Not just timing but as well performance in % delivery.
From my view, this is one of those catalysts where it is possible to construct a better edge than how one might be taught by others or what might make the quickest sense. The key is to collect all reverse split tickers that had activity after the split and observe if there is some common behavior that can be extracted as an edge. And if there is something to it.
For example, such tickers often on day 1 of pumped low volume move tend to top out relatively quickly within 30-60 minutes of push, at around 50-70% range. So the data is quite decently consistent, and yes this pattern is not frequent, but it surely is far more defined to play it like that from the short side and have much less time exposure on the ticker, versus playing it typical long side where one might have to sit in a position for a very long time before that pumped squeeze plays out, if it does, because in more cases than not it does not. Having capital locked in a play for a long time, not just that it costs you future opportunities, locks buying power, but also drains your mental power. Simplicity of playing long side as described above has its charm as well, but the sacrifice of that is edge quality is lower.
Example of the pattern above in its structure and what to look for, especially short side of play on R/S -pump-offering ticker:
Reverse split long/short play is a good example of oversimplification in the works. People tend to pick the fastest and easiest route to come to conclusions and form an edge around there.
It is much more straightforward to just wait for the company to announce a reverse split and then go long into the expectation that stock will push somewhen soon, versus building a short edge which requires patiently waiting for the ticker to start moving first and then researching its typical behavior to even figure out where its best price to start short position.
One can see that method one is far less time-intensive and less difficult while method two is more demanding. The ease and shortcut mentality is a frequent issue in small-caps that make many traders and investors oversimply news based on suitability. Difficult? Get outta here. Easy? Bring it forth. Again the argument here is not pro-long or pro-short, edge can be extracted both sides. The argument is to do it for both sides but also to adjust the easier methods into more fleshed out ones.
This leads to the fact that news catalyst and its interpretation is one thing, but knowing how to use it well with the best efficiency is whole another thing. To define that, do not have to be locked into the ideas of others but rather explore and test on your own to see where more efficiency can be found.
On the images below are three recent reverse split tickers, none of which had pumped moves after splits and have all declined substantially after the split was implemented. The simplified method of "just long reverse split ticker because it will get pumped probably" is therefore often a failure. Or at least it is not as simple as it might sound. The key is not that edge cannot be built around it, because it can be, it is to highlight that selectivity and better-defined context are needed for higher accuracy. MOGU, PULM, and AIHS as examples.
Remember this, most catalyst edges are going to bit more complex than what you are being told. That is because markets extract efficiency out of things that seem to be too easy to comprehend. They make it so that edge will be only extracted from the more complicated version of it. That is the point of highlighting all the different examples in the article.
So longing reverse split ticker maybe might be a no-no, but longing reverse split ticker under the right market cycle, with the right pre-market action, with a company that needs to dilute urgently (low on cash) and then delivering just the right move that it might result with offering following? Now we are talking. Such an example on the image below for CLSN.
This why no matter what news play you might structure for your playbook, make sure it is layered with variables and it is not just one condition for long/short or up/down.
The agenda play (reverse split ticker)
It is often a good idea to research news catalysts within their broad context (plus-minus one month before and after news is released) to understand the agenda in play often. Deconstructing the agenda will lead to a much better understanding of why certain news catalysts often happen in small-caps, and that much of it is planned in just the right sequence ahead so that the whole agenda is executed for the company and the market makers.
This is why playing the long side of the reverse split is only one portion of the picture, and playing the short side after the pump of it is the only second piece. A much better approach is to understand how the play can be structured on both sides if conditions align with the potential offering on the ticker. The pattern outlined below is relatively frequent if everything matches the explained conditions well. Therefore the edge is on both sides, but the agenda becomes especially clear only on the short side if everything matches the potential offering. Ticker CLSN is such an example of offering play on pumped reverse split ticker.
The example above is a good way how to refine patterns for increased chances of accuracy when playing on the news. The long side of play (long reverse split ticker) is somewhat poor because often tickers do not get pumped for a long time after reverse split. Playing the long side only once the ticker starts to move can also be problematic because one might miss the early action in pre-market and already chance the long too high later on. But waiting for all three conditions to first check themselves (R/S+pump+completing avg % move) can yield higher accuracy play on the short side with also better RR. This is an example of when multiple variables and playing on the final agenda can be better than an easier single variable approach.
For anyone interested in the pattern above make sure to research many reverse split small caps, to better validate the arguments.
Okay but enough about reverse splits, this was just one example of how catalyst can have different interpretations and different quality of edges formed around it.
Long versus short bias mentality
-Cheering for the underdog (optimist)
-You ain't gonna make it" (pessimist)
As someone who considered being almost like an experimental rat going through all those years of observing markets, and forming my views on current topics, makes you notice certain personality faults or weaknesses which can have a huge long-term performance impact, typically to the downside, especially around news and their interpreting.
interpretingPersonality traits are a construct of the extremes, to left or right direction. Neutrality is starting ground. Reality or realism is the construct of black and white extremes, basically gray in the middle. But the character and personality are by default pushed to either left or right (or black or white) extreme because that is where exception and uniqueness is built.
While we should all be fully neutral in order to rationalize news catalysts as objectively as possible, the reality is each type of personality is more inclined by default to a certain type of catalysts and as well interpret them in the somewhat pre-disposed way. The only question is how that interpretation changes over time as this person behind observes their own faults in under-delivering on objectivity. We are all somewhat biased, the main difference is some observe and recognize this well and adjust over time, and some do not.
To return to the previous point, from a personal angle, and as you observe others and their primary leaning personalities (optimistic or pessimistic for example) you start to observe patterns in how each of those groups absorbs the info and comes to conclusions. And what matters especially is common mistakes that each of the groups makes, which often are tilt away from realism or what I prefer to call personality drag.
So should you be self-aware if you find yourself too pessimistic or optimistic too often? I believe fully the answer to that is yes. Strong optimism or pessimism if not combined with very good knowledge and experience in the market can lead to quick damage to trading or investing performance. One should be aware of that and address it by implementing small changes on daily basis. This is because in relation to news interpretation itself without addressing that there will be skewed bias present at all times.
Weaknesses in each:
-Optimists tend to see news and want to believe the company to be a success. They have faith in individuals running the companies and are more likely to think of them being competent and honest. They have a tunnel vision of seeing only winning examples of companies from the past, those that did turn into exceptional stories while dismissing all the waste ground of failed projects that surround them.
-Pessimists tend to see bullish news and underplay the significance, even before doing proper research into it. They see individuals running companies often as shady, because they have seen it before (once or more), and conclude based on a few examples that possibly everyone follows that pattern, often unjustified or at least highly skewed. And in some cases very much justified, the range can be wide, depending on how detail oriented individual is. They have tunnel vision of remembering all success stories that turned into major failures soon after and then expecting that everything might follow such a pattern. They often fail to recognize real exceptions because of oversimplifying and not making a detailed enough difference to see the worthy exceptions.
From a personal angle, there is nothing more valuable one can do is to engage in different markets where bullish or bearish conditions are at extremes. Markets that allow for a higher amount of optimism and markets that at the same time allow for more pessimism. Being engaged in such different conditions will really highlight the errors of judgment you are making on daily basis, and show you the light, or at least show you where the balance is. This kind of mistakes are best observed on your own false perceptions, and having exposure to more than just one market is best way to improve on the optimism/pesimism scale and markets at once like that. So get that exposure and do not be locked into just a single market.
Be wary of only optimistic or only pessimistic input
Since beginners in markets tend to be more inclined to optimistic investing opportunities it is needed to be self-aware that this might reinforce the issue of quality checks or lack thereof. Websites and news or content providers that are strongly bullish inclined have to be finding long opportunities in any market conditions which makes them prone to rushing and forcing opportunities often. This is why any bullish or bearish only content provider is much more inclined to low-quality opinions and forced opportunities because every so often the market will shift into a state that will not be suitable for that direction of opinion opinions.
Keep in mind the only way for someone exclusively bullish or bearish bias to have impeccable content value would be if the market trough the entire time is only in bullish or bearish trend, with no interruptions. Obviously, for any non-science-fiction readers, this is not the real world. In real-world markets go through changes of bullish and bearish trends all the time, especially smallcap stocks are even more prone to strong shifts between hot and cold cycles frequently. Therefore be aware of what kind of content you are consuming too much. This especially is meant for news sites. It is why if one checks a typical small-cap website that deals with news, sooner or later articles as "is it too late to invest in X company", or "why this news will send stock to X price for sure" spring up. Highly bullish bias content that makes you believe investing or trading those companies is as easy to just reading an article and punching a buy button.
The reasons are fairly straightforward, the targeted audience is a non-demanding investor. The easy route type of a guy for many of those sites. The content is already curated to fit whatever the people are seeking for, feeding confirmation bias.
Ideally find and focus on sites that do a mixture of investing and trading or else, are not exclusively long-biased. Short and long-biased news sites are far more likely to navigate the value well due to the ability to seek opportunities on both sides. Be well self-aware if too much of your content is bullish or bearish tilted. There has to be a good balance, or else your growth and knowledge will get stuck.
Without being too direct on this, calling any sites behind their back, there are plenty of long-only (bullish mostly) sites or services out there (mainstream media, Youtube, etc).
The common pattern in the majority of those is that they tend to force their single direction (non adaptive) views, basically for different reasons. By forcing views I mean, the quality of well-selected opinions on which stocks are worth a play versus those that arent is low to non-existent. There is no selectivity, everything is long and bought sooner or later. And when the knowledge is also provided from such services in very strong bull markets (such as 2020 or 21 for example) the whole perception for market participants can get very quickly distorted. Nothing stress tests the content better than prolonged bearish or bullish stages of the market, no emperor can hide without clothes for long in such an environment.
While it is important to keep watchful eye on what content you are consuming (not too one-sided) it is also important to observe your own info biases. It is also important to understand that long-biased investors tend to be more sloppy and short-sellers are a bit more detail-oriented, but that does not mean one group is morally on higher ground, even though the short-sellers often do think that.
For example, the short seller might be more prone to selectivity, because swinging shorts require margin, larger fees, and forces one to rethink ideas better. Because markets are somewhat more likely to go up than down over the long term, it makes one think through short ideas more (although that is not necessarily true for small-caps). Because of the same reason, long view market participants are often reckless because they are under the belief that any poorly timed long trade or investment will eventually get bailed out. It will recover, so not to worry if picking a few bad apples in a row. That is one of the reasons why following individuals, media, and content providers who play markets on both sides is typically better because there will be a need to rethink ideas more.
Now obviously that does not mean those do far better on performance just because they are being more critical-minded and careful on selectivity. After all many hedge funds that trade and invest in both sides directionally struggle to beat the market. It's not that game gets easier, that's not the conclusion. It's just the quality of content is likely to be higher from those sources. Mostly because the "bailout effect" is a major component of bullish market observers or content providers. Swipe the bad calls under the rug just so that you pull them out once again after they turn into winners, as long as the position is not margined of course.
The conclusion of this subsection would be:
-Find content that is balanced and not only bullish or bearish side
-Work on being objective daily and work on your neutralization project of making yourself less optimistic or pessimistic over a long while
-If newer to markets be especially aware of the shortcut mentality, it is a big trap for many. How do you know if you are a victim of it? If all you think about are the next 1000% movers that should do it. Downgrade to reality. Frequent big gainers come at the large expense of knowledge and research unless you aim for luck which this article is not about.
-Very importantly, surround yourself with individuals who are on all spectrums. Bears, bulls, and spinless "I don't know-ers". You need them all to observe the calibrations and how many times each of them gets things wrong so that they serve as your buffer of adjustment.
Exciting vs boring catalysts and the dangers of each
Something to be aware of, excitement is a major driver for many beginner market participants. It is why so many are often rushing to make sense of small-cap markets by reading news because those catalysts can be diverse, each sector for its own, strong positives (cancer medicine for example) mixed with strong negatives (dilution). The excitement in markets is like a drug, it's something that grabs onto many and does not let it go unless one lets it go.
Risky business models of many smallcap companies will create the perfect blend of darkness and light that will create just enough drama to hook in the beginner individual. That for example is something that is much less common in larger-cap stocks, where the company becomes far more stabilized, streamlined, and less risk-averse. All of which makes often news released rather boring and uninteresting to read, because they are also very much similar to the news releases from the recent past, or are not that significant in a change of direction makes it hard to short term traders to figure out how should that impact the tickers price in the first place.
Smallcap news releases although can be very noisy in figuring out exactly how should particular catalyst impacts stock performance on a short term basis, at least they are expressive enough to give the market participant a good fictional story to build some high conviction thesis on, even if that might be complete fiction or oversimplification.
The key takeaway is if you feel excited about the news you are reading often, highly likely something is off. Your objectivity meter is not functional. The valve is broken.
Test of excitement shows you just how much research trader or investor has done, because typically those that do enough homework into researching catalysts and behaviors of stocks via the news releases will be more likely to be downplaying excitement often, rather than the opposite.
This should explain why StockTwits can be a very dangerous incubation area for beginners. Excitement on top of excitement on top of excitement. But make no mistake, the same could be said for some bearish inclined platforms or sites out there, that do just the same, but on the inverse. Finding excitement and calls of the doom out of every tiny bearish print in economic conditions, again and again. But the story gets old when you make it so when testing is performed and no sooner than that.
As long as you prioritize entertainment in markets above the edge you will be fed and seek excitement frequently. When you invert that compass and go for value and accuracy instead, that is when you prioritize the edge for the first time above the entertainment and your excitement meter is likely to decline on average values.
Careful vs abundant markets
Smallcap markets shift from stronger cycles to weaker cycles, where volumes and capital participating can differ quite a lot from month to month basis. This is very important to realize because it can impact how the market will consume and interpret the news catalyst, basically one has to think of it from this basic perspective:
-in strong cycles markets are very irrational, risk is ignored, and non-skeptic
-in weak cycles markets are more rational and careful, more risk-averse and more skeptical
Or to keep it in other words, you have to sell (present) the same kind of story twice as hard in weak cycles to do the same impact than you would in strong cycles. Because of that understanding current markets, momentum conditions is important to set better expectations just how strongly the market might react to current news.
And it is as equally important to realize why that is. It is not because a beginner retail investor all of a sudden goes from beginner stage to enlightened stage as the cycle flows shift. It is because market makers and institutional players remove their foot from the pedal. Those have to think of numbers at all times, how many active participants can be attracted to a particular asset class today? How many tomorrow, on current money flows? That will depend on how much pedal the market makers might push depending on the conditions present, which might create certain same news catalysts to deliver 1X in a weak market cycle, and at the same time deliver 3X percentage move in a strong market cycle.
Careful markets and weak cycles will render down the positive strength of news catalysts.
Abundant markets of strong cycles will increase the positives of catalyst and decrease the significance of negatives at least short term.
The above is the holy grail to understand when it comes to understanding the news in markets. Without understanding that in the first place, and without defining current market cycles approximately to fit it into the right context, everything else will be a waste of time, because nothing impacts performance of tickers after news release more than an extreme market environment if it is present. This means that this should most likely be the foundation of any news analyst out there if one needs to define asset behavior and price action, short and mid-term based on the catalyst as additional weight to the thesis.
In strong cycles and strong bull markets, the market will ignore the negatives and weaknesses of each company and asset class much more. Not fully, but more than typically. It means that in short term you should as well. Now long term that's a completely different story as it matters how long can certain things be ignored before the reality sets in, but certainly in the short term case, things can be pushed under the rug for at least a while if market flows are strong enough. Pessimists and generally too bearish-biased traders and investors tend to completely under-estimate this concept. Markets are a battleground after-all, a highly rational small battalion of elite units cannot defeat the opponent at 10X scale. The skills typically do not scale to that point and at some point, numbers do their work. Do not get run over by your elegant ideas, when it is actually time to retreat, if bearish.
And vice versa of course. It is healthy to think that in weak cycles or a bearish market in general, it will take a lot to convince the broad market to bid on a certain news release, and especially to sustain that trend for at least a while. It is not that unusual to see strong bullish reactions to good catalysts in bearish markets, but what matters is that the chances for this price reaction to fade to the downside is highly increased and is very likely to happen. This means that market will sell off sooner or later with good news in broad bearish market conditions. Again, this has to be implemented in small caps as well, as the functionality is just the same there.
To read more about smallcap market cycles check the blog on that topic.
One key thing to conclude before moving on, personally my watchlisting process in weak cycles is very different from strong cycles often. Time spent on reading news PRs is very much decreased in weak cycle conditions because the bear forces of markets are stronger and it is much more unlikely for tickers to surprise with the kind of catalyst needed to outperform. And the opposite is true in strong cycles, more time is devoted to checking news there because chances are that in strong cycles some hot/hype sector will be running, and checking the news might make a lot of difference in some cases just to how excited the market is going to get. This tip should help you to improve your efficiency overall.
The macro force vs intraday force
Even if the ticker reacts strongly to the news it doesn't mean it has a good chance to hold for while. Or even if it does hold for while, it is still likely to fail, if strong cycle conditions were the reason for the ticker to hold with strength for a while after initial news release.
Traders and investors are often not well aware of just how much strong market conditions contributed to pushing ticker to where it is as news often had much less to do with it than it seems. It is just much easier to pinpoint the move to something small and particular like news release article, rather than something much more complex such as while market cycle, that is why when something does move big, people will look for quickest and smallest possible explanation on why it happened, rather than a foggy mess of contradicting reasons.
When judging the contribution of catalyst to actual price performance, one has to always be aware that the cycle itself could be a major contributor, and is often difficult to separate the two. On the other hand, the long-term macro force, the balance sheet, and the gain/loss-making business model will eventually dictate whether the current news catalyst will have a chance to sustain the price or not.
This means that one is asking two questions, one: Has ticker ability to move to a certain price based on current news, and the second: Does it have the ability to sustain there for while or will it mean revert quickly? Those are two key questions, to find consistently decent answers the context has to be addressed well, as many times mentioned on article so far.
As the above picture suggests everything in markets is like a Russian doll matryoshka, stack within a stack, the smaller context within some broader context. Nothing is at its face value as it seems because the outside conditions will define the probabilities, depending on how they are currently present.
To judge the strength of catalyst or the implications on price behavior it is often a good idea to do a quick research on the company just to get aware of what is the projection for the company for the next two years in terms of growth, balance sheet quality, revenues increasing or decreasing, capital expenditures, basically everything that could make current news catalyst more worthwhile or less. This is especially important for long-term swing traders and investors. For traders, it won't play that much of a role, however.
But as you can see, if one was to implement news into the directional thesis of asset well, the whole homework starts to stack up fast. It does not just end by reading the news article itself, but it rather extends far broader in the context of company itself, its balance sheet and whatnot.
Lack of statistical research, too much common sense mentality
Since news or stories can be very subjective content up to own everyone's interpretation, common sense thinking might start to play too big of a role and have a detrimental effect.
Math and statistical guide should provide more objectivity and should be critical for anyone trying to implement news catalyst into the thesis process for smallcap stocks, but doing it right can be a challenge. This means splitting news per different type, and just roughly checking what tickers like to do when certain news hits.
-What are the % behavioral ranges (do certain news on avg squeeze a lot more?)
-How long do they hold up in terms of hours or days, and other conditions?
-Does particular news tend to top out ticker earlier than some other? (weakness)
Doing basic data collection like that can help to clarify if one is on the right track of news and edge implementation. If data returns too noisy and un-conclusive results it means most likely the refining will be needed. And refining is typically done after more context variables are found, which can be a very long research process (months).
But be warned, the idea for that is not to find holy grail news investing strategy where statistical results will give you clear insight on what catalyst to buy into and which one not, or where to. Not at all. The main conclusion of this kind of research should be, that the end performance of tickers relative to news themselves will be very noisy, and quite random, if catalyst type or "strength" is used as justifying condition. It gives one humility on how useful the common sense in markets is, and that common sense is much more often rendered neutral (neutralized) through the large sample data. Much more often than anyone who has never done any significant research into the market might think. Logical assumptions are highly overrated in markets in general.
As mentioned before to find an edge out of news it requires more of puzzle-type approach where one understands just what kind of pieces do need to be pushed together to form a probable thesis on the ticker, rather than just coming to conclusion from reading single news article.
Therefore the idea of doing some statistical research into news in the first place is to broaden the horizon, to become more open-minded, not to necessarily quickly find some edge. To see what you didn't see before. See that what many media sources make you believe as in "just buy this strong catalyst" is often far noisier in performance than it might look. As you expand your horizon you realize that there is more out there, more that you need to add into your toolbox to not over simplify things in markets, as for building an accurate thesis there is more to it, in most cases.
The danger of "falling in love with a story"
Everyone loves a good story, bulls like a great optimistic story, usually easy rag to riches, and bears like a story with the bottom falling out to prove to themselves or others that staying out and cautious was the right thing to do. In small-caps it's not the bears who are as much in trouble, because tickers will be more prone to fades than they will be to sustained rallies over a while. It's especially the more bullish inclined individuals who will need to be more careful, the reason being is that bulls are already typically too bullish biased (often due to simplicity reasons as short selling requires more insight), with confirmation bias all beginners often lurk for are some hints here and there that solidify their vision for the asset, therefore just the right kind of story is needed. Luckily there are many sites or individuals on social media that provide just that, creating this cluster of deception for those bullishly biased individuals.
Confirmation bias when being bullishly biased is problematic because news PRs in small-caps can often be perceived too quickly as overly bullish, especially due to exciting factors and often very strong or rare catalysts that companies tend to release. For example, imagine holding stock for 5 months with nothing significant happening around the company, just so that they release a catalyst of completing the middle B phase of cancer drug research and on top of that receiving a grant in size of 1/3rd of market cap. It doesn't take much to tilt beginner individuals into seeing all sorts of cakes and unicorns when this happens. Just the right amount of idle time passed, combined with an emotionally positively charged catalyst and you have yourself a love story that long-term investor needs. The one who is not looking for credibility or validity of his thesis nor is interested in weak spots of such thesis.
The basic rule is, that you should downplay your excitement when it comes to rationalizing news catalysts in small-caps if somewhat long biased. It is skill that needs to be worked on.
"Falling in love with your thing"
And a different kind of version of falling in love with a story, is a bit more specific one, its not just any story, but it might be your kind of story.
One especially problematic concept is to only deal with subjects and sectors that one is either working in or has substantial research into (not just for monetary reasons but there is a passion to it). It is much easier to be subjectively biased towards news releases when being exposed to that kind of sector. It is very hard to conclude what should be done about it. If you do not have a passion for something, you will not research it in-depth to the point where credible knowledge will be built. Therefore to become credible it is recommended to do it around sectors you find a great deal of interest in. But as you do that, your subjectivity will increase and your perception of weaknesses or strengths will no longer be where someone else's who looks from outside into such sector might be. it is a very double-edged sword. This requires constant calibration, and constant self-doubt to see if you are not currently drunk with too much influence of passion that is clouding your judgment.
For example you might be mining Bitcoin individually on your PC rig and you are invested in smallcap company that does crypto mining as well. You have plenty of insight on how mining industry operates. You might know more about business model than others do. But will that insight really outweigh your potential blind spots that passion creates? Because all it really matters is to answer that, do positives outbalance the negatives. Sometimes it is better to look into the industry from outside without having foot inside it, because one does not get attached to the result of battle as much.
Or another example, there are many great microbiologists out there in social media land, that contribute unique insight into smallcap stocks and their catalysts around the biotech sector. However many of them are specialized only in one particular niche and not as much in others, which often makes them over-value the catalyst impact because they do not understand the business model of those companies well enough to see how that model might reflect negatively on stock price, rather than positively just based on catalysts perception. The science is super fascinating, but burning tons of capital might not be so interesting for institutional investors.
Specialization makes often everyone fall in love too much with their own thing, projecting all possible scenarios out of that. Be careful when trading and investing in tickers that relate to the sector of your large interest or passion. Be aware of when your passion might cloud your judgment. Why? Because it will. The question is just on a case-by-case basis, how well are you able to control it with as much objectivity as possible, that is the only controllable part. There is no on and off switch, it is only a dim the light switch, and tone the brightness down so that it doesn't blind you. Medium bright light is useful because it makes you see things better, but very bright light can blind you.
Cost to finance news
A quick summary to this would be:
Loss-making companies that are low on cash reserves often need to finance any positive news typically at expense of stock price through dilution, unless the news can quickly shift capital structure and revenues. Additionally because many are in experimental sectors, it is not highly likely that news will have a positive end-result (higher rate of failure eventually), they might fail to achieve end goal, which means the institutional money will be careful when placing long term bets on such companies at announcements of fresh news PRs, regardless of how YOLO biased the retailer might be. Remember that, when you try to get excited about the news and you only look one step ahead about how bright the future might be, there are larger players who think three steps ahead and how the company's balance sheet might look like 1 year down the road, based on the current news and previous facts about the company. It is healthy for accuracy if you think like that as well. The key being, is that single news do not change what companies are, single news catalyst in the majority of cases does not have such capacity, so the mean reverting price move is likely to happen to where the average price of stock traded for company is.
Understanding common business practices and failure rates of companies within each sector is very useful. It prepares one with the right foundations and how likely it is for the company to perform decently over the mid or over the long term. It sets at least basic standards so that one understands whether the long-term force is bent for or against the company to succeed. Or perhaps the right word to use is not "success of the company" but perhaps, can a company turn profitable decently enough to reflect that in share prices with upside momentum since that is what after all the game is about for investors or traders who are long-biased.
This gets more obvious to older individuals, especially if they have dealt with their businesses, or have experience in innovative sectors, those that are often quite harsh and difficult to succeed in. But for younger individuals, it might not be that obvious and it is why researching it historically is well worth it. Too often the perception is great news=high success rate, or great news=high chance for price to sustain higher, which is not true. The long-term success rate is a default stat that doesn't change much and the short-term single catalyst in most cases does not change it by much. Addressing that is needed, to understand why.
The reason why pointing this out is that smallcap stocks tend to be in sectors that are innovative, experimental, and very high risk. Like any business, there is capital in and capital out. It is easy to be neglecting one side of that equation based on one's default bias.
For example, perma bulls might neglect the capital outflows and cash burn needed for the company to sustain, while perma bears will only see the negative side of the balance sheet and fail to see those exceptions where short term inflows of news can change the balance sheet of a company strongly. But realistically it is much more likely that perma bulls underestimate the costs and likely success rate since those companies won't often be surprised with real 180-degree reversals in their capital structure and revenue inflows.
It is important to be business-oriented when it comes to defining the risks and success chances of those companies and to at least somewhat understand how the balance sheet might be reflected in companies' long-term stock performance. Using news as justifications can be the too neglecting approach to seeing the whole picture. It helps a lot when you try to make sense of the current news catalyst, to place it into the context of companies balance sheet and its past news. Using context is key always. Without understanding, if a company burns a large amount of cash or not, a news significance could quickly be skewed.
The key reason why anyone in markets gets news wrong, and over-values its impact (on both upside or downside) is typical because they don't see the full context. They don't see how the news fits into all that surrounds the company. A plus is a plus if that is all it is. But a plus is no longer a plus if stacked along plenty of minuses. And vice versa.
The point of this section is that many positive catalysts in small caps come with chains strapped down. You better find out just how big those chains are and how much they might cost long term, to see if ticker has chance to sustain the move. Cost to finance the cheering.
Biggest movers are often without news catalysts
And then we step into an even more disturbing fact, it is that the biggest multiday runners often do not have any major catalysts, or any catalysts whatsoever igniting their moves.
This further discredits the idea that for smallcap stocks to move the news PR is needed. The moving small-cap stocks without news catalysts are at high enough numbers that one could conclude that market is structured from both PR and non-PR movers. While catalysts are always present, those catalysts do not necessarily come in form of some fresh news release around that specific company that leads to stock rallying. The catalysts I am talking about are typically macro-related, passive catalyst that is correlated to the sector to which the company and ticker are exposed.
Let's look at an example of IMPP of a recent multiday runner, which had no active catalysts present in its initial stage of the run. And even any news catalysts that did follow were not meaningful, the reason why the stock was moving was particularly due to how strongly energy prices have rallied, and the market was just seeking for its cheapest ticker in small-cap land, to push the inflows into and get the action going. That is how in most cases those 1000% multiday runners come about.
This kind of behavior is not unusual. There were plenty of small-cap stocks in the 2021st EV sector rally and weed sector rally a few years ago, where many of the biggest runners did not even have active catalysts released, or if they were none the catalysts would have justified the magnitude of the moves. This leads to the fact, that understanding the hype momentum behind macro sectors in play is far more important than reading the news releases, because tickers will often ignite before any news is released, at least those that do eventually turn into major runners.
The point of those relatively simple tests is to see just how much weight the news releases themselves contribute to potentially creating large runners in small caps.
Let's lay out the typical day of small-cap movers as such:
-Day 1 gappers on PR news (30%)
-Pumped tickers midday on no PR (30%)
-Multiday runners on no PR (30%)
The distribution will be different from day to day, but it is not unusual to see that half of the total tickers will be moving on no news releases. And it is often to see that those tickers will be the strongest movers and most sustained (multi-day). This should give you perspective on just how much the news PR is a necessary factor in small-caps to get the stocks moving for that particular company / stock at least that is. Feeding of momentum and leeching will be a primary route, not the news PR-ing.
The role of the flagship can be far more important than news releases
Whenever it comes to small-caps make sure you understand the key asset that is igniting the strong cycle and creating those larger outsized opportunities. In most cases strong cycles of small-caps are ignited by macro sectors of large caps or commodity markets, understanding which key ticker the market is feeding on is key. Flagship is that one key asset with the biggest liquidity, with a big percentage move, and most likely by far the biggest media attention that keeps lasting for several months or even more than a year. Flagship could be a currency, large-cap stock, or risk-off asset such as gold.
Such an example would be in early and late 2021 when the EV sector was running hot. The flagship of that small-caps strong cycle was ticker TSLA. Often when such a ticker is running strong it is difficult to tell how much it contributes to smallcap tickers' performance, if isolated. That if you were trying to figure out how much the news impacts the correlated tickers of the EV sector in small-caps versus how much the flagship itself impacts, it would be impossible to come to conclusion on spot. However, luckily that is where backtesting and researching more of such samples in past can crystalize the picture more. Turns out that flagships' performance will be the key contributing factor if news PRs are excluded. This means that regardless of news catalyst quality the tickers (small-caps) will still be able to perform well even if news PRs released for those specific small-cap companies are relatively weak or nothing out of the norm.
Let's take the example of how ticker AYROs had an earnings catalyst in early November 2020. On face surface, it seems like the news had to be exceptionally good to move the ticker like that. But not until we overlay the fact that TSLA (flagship of the AYRO sector) was right at a major breakout at the time. Do you think this correlation had nothing to do with the major outperformance of AYRO and it was all rather contribution of earnings news? Because let's not forget, AYRO had many earnings before, none of which were able to put moves as close to this one in magnitude. Not to even mention that earnings numbers were by no means surprisingly good if anything they were subpar.
It is an ideal example of just how much a poor catalyst can move a ticker to upside if the flagship is displaying major strength, and the smallcap tickers start to feed on the flagship's momentum. The news PR will just be a needed spark to ignite the momentum, but there won't be any real qualifying factors for displaying of catalyst to improve chances a lot. This has to be highlighted because beginners can get quickly confused on just how did ticker manage to rally as much without catalyst delivering the very robust report.
This highlights just how much of a role flagship plays versus the news catalyst itself.
On the image below ticker TSLA, the flagship to AYROs rally.
As long as there is wind in the sails of the flagship, the whole sector can still perform well, regardless if news catalysts are weak. That certainly will not be the case when weak cycles set in and the whole sector momentum becomes fragmented, each news catalyst in such a case is likely not to be able to sustain the ticker's price, and small-cap tickers will be more prone to fade. Understanding the role of the flagship in the context of strong cycles is therefore very important, make sure you fully understand when small-caps are under such momentum, which ticker (flagship) is the culprit and then closely follow its behavior as well. You should have a flagship ticker on the side watch of the chart as well, but just make sure you do not try to compare tick to tick action, it is an only rough intraday guide, not very precise one (flagship-small-capper).
As long as flagshipper is doing well, there will be a rush into small caps. The news meanwhile if weak or strong won't make too much difference. But also make no mistake, just because the flagship ticker is strong it does not mean that small-caps will feed of its momentum forever. The clock is ticking. There has to be the presence of notice and the whole sector needs to be relatively young in terms of attention span. After a while market will get bored of it and move to something else, so even if the flagship remains strong the small-caps will no longer feed of its strength after a while. Cycle in, cycle out. Understanding and having a pulse on that hype of the market is therefore important, as it won't last forever, so be in tune.
Another such example of a flagship's role in determining how the market will consume the (productivity/revenue inrease) news PR is for ticker MARA about Bitcoin as flagship. Even if catalysts' strength was increased on the second go, the market completely ignored it and sent the ticker lower. A perfect example of how the market will ignore the strong attributions of news when cycle momentum cools down into fear mode and vice versa is how positives will be played to the upside when cycle flows of its flagship will be running hot. Trying to comprehend the news impact outside of addressing the flagship and cycle flows therefore is not a good idea, it is an easy way to get trapped.
On image below there is Bitcoins chart overlaped to MARA above.
The flip-flopping business model and chasing the hype
Small-cap companies sometimes flip from one sector to another based on what is currently hottest theme in media hot to attract capital. For someone looking from a fundamental perspective, this looks very bearish, as switching to a new business model should be very capital intensive and therefore worsen the balance sheet, and pull many of those small-cap companies even more into negative cash flows. That is in theory.
Realistically it is not rare that when those small-caps do shift and use the latest hype train to do so, their stocks often rally quite a lot, if timed well. Timing will be critical (not just for you as an investor or trader, but for company relative to stock price also). Even though it might seem underserving and from a valuation perspective a big cash burn trap, the market often doesn't care, on a short-term basis at least. This gives another insight that just because something makes sense from a valuation perspective it does not mean that the stock price will reflect it straight away.
Hype flipping business models can sometimes be great long plays, at least for a week. It is one thing to understand business structure and it is another to understand behavior and performance. No exceptional knowledge will be enough to build an edge if one does not research behavior and context well.
Do not overvalue companies that stick for a longer time in one sector only either. Being a saint or holier does not increase the stock value of small-cap companies. Markets are often not the tool of justice and might reward irrationality, at least on short term basis.
Example of ticker ANY that flip-flopped the two sectors, but the market still bidded the ticker, regardless of how this might impact the stability of the company because the hot sector of crypto was the strong flow at that time. This shows that it
isn't a good idea to be too skeptical when it comes to valuations of small caps short term and defining plays upon that, because the opportunities can still be very much on both sides and quite mixed. Both long and short, if the right timing is picked.
The point of the example of ANY above is that small caps often create a good bias out of the news and what is happening around the company can be quite a mixed story. Some factors point to upside potential and plenty that point to the downside. The question will be just how strong current positives are relative to the negatives, that will usually be the key question. Typically the question is always: Can demand outwin the supply= What kind of firepower is needed for that?
Professional business models for grabbing the attention
With the growth of the internet and the educational content that relates to it, since there is often no curation to the content by science it is relatively easy for dishonest information to be placed forward with a hidden agenda. Or at least for information that should be invalidated, it never gets invalidated and removed because there never is real test structured to do so. Even though that agenda might be covered in real informed insights, the positives might not outbalance the negatives. What is meant here is that many educators might make you think that you should read some content just because it is what they specialize in, it is what they can sell you as their value add. The bottom line ends where if that content does not have follow-through on the execution, it becomes therefore a distraction. So there is a real difference between distracting content in financial markets and carefully tested content that packs a punch. The ratio is highly tilted to the distracting content, so be a careful young explorer.
There are many education providers in financial markets out there (not just small caps specific) that will make you think that reading news every time before trading or investing into such ticker is critical. It is so because it gives you more insight and creates a better plan, but is it?
Those who do not like the work of easiest shortcuts and like challenges are going to be more prone to reading more rather than less as they will perceive that work was done for whatever the net P/L they produced at the end of the day. This is especially a trap for individuals like that (was myself in early smallcap trading as well), those are the most frequent targets of those attention selling services. And it is not that those that provide info or explanations of news of being intentionally deceptive, it is just that they do not test their assumptions, and others who follow them do not test them either. It becomes just "it makes sense, therefore it probably impacts market, therefore i should trade around it". So it is a spiraling circle of yanking eachother without breaking that spin once in a while by running some validation/invalidation tests, to see if time is perhaps being wasted in some areas!
As someone who is a very sloppy individual and in past didnt care about details, markets have thought me that you have to care about efficiency whether you like it or not. Because if you do not care about efficiency, the market and educational material will steal every minute of your time until you did not just run out of every minute but you start owing time to some higher structure of market gods. Efficiency does matter, what you use has to be impactful, has to perform. Else its just entertainment masked with care.
So whenever someone tells you that "reading the news before trading stock" is a must, ask them why? And you better get a very good answer on that, with many samples of proof of concept that reflect it (along with failures ideally to build the whole picture).
Whether you decide to implement news into your trading thesis, there should be always 100 samples plus a historical test to confirm if assumptions of news impact on assets even have some consistency to performance at all or not. Reading it or not reading it, does it impact the factor/accuracy of defining tickers' directional move by a decent enough factor and is there major difference between one and the two (reading it vs not)? Because that is what the test should be focused on. Are you wasting time by not adding any efficiency to your quality of the thesis and trading/investing performance, or is there real value-add to it? Those that aren't there to sell you deceptive educational material already have that answer well laid out for you, because it was their intent to figure it out before passing it forward.
A lot of short-sellers spend time reading fillings but in the end, the application to edge is rather weak and often unclear (and very hindsight oriented). A lot of long-biased investors read columns from insiders of certain sectors, yet they fall short outperforming those who spend almost no time reading any news at all.
Yet someone might make you believe that you should never trade without knowing what dilution is, or how the industry operates. Do you see how an attention-grabbing mechanism can pull you in the direction of those who aren't particularly interested in providing you an edge, but rather just information that might or might not have any applicable value? Welcome to the internet. Attention=dollars. So if you are spending dollars, you need to get value out of it. And by that it doesnt mean being brighter and more educated at the end of the day, but increasing the efficiency of your time spent.
News reading can be a very quick sinkhole of time. It can also make some individuals think they are putting some work into it, and impacting their edge positively, without actually confirming it. It can be a deceptive area, so be aware.
All rules and layout of how news is applied to the edge have to be extremely clear if given by someone else as a guide because otherwise, it can quickly become too conceptual.
Proper calibration of news into trading or investing thesis should address everything within context to define chances better, from cycle flows, to balance sheet and loss/gain making aspects of the company, to competitors in the sector, to chances of failure or success within net 6 months, there is a lot that goes into fitting single news catalyst into good context. But isn't knowing a lot more about context just another potential new sinkhole of time just to find out if your initial time spent reading particular news was a sinkhole in the first place? Sadly that is exactly the truth often. Much of knowledge in markets never gets to be deployed into the clear edge.
Specialization in decrypting the news
There are some on social media, or media services who specialize in providing a detailed explanation of what the current news catalyst means in terms of the product quality/future that the company is involved in. This won't be the case for all small-cap companies, since some will engage in relatively easy-to-understand products, such as e-commerce for example where it is not hard for anyone to research the product itself and its whole supply chain line, whether you have or do not have industry experience. But certain products require a lot of specific industrial insight to understand news article really means. Such might be biotechnological products, especially drugs, nano products, or certain financial services. Complexity can quickly become to ramp and often it is there where someone might jump in between to provide a in-depth explanation on it.
I am not here to discredit anyone, because many of such services that specialize in dissecting the biotech news, for example, to provide you insight into just what the latest phase 2 research means for company might be all well in intent, honest. Their services while they target investors, they are not there to provide an edge, only insight into complicated information being explained in a more digested form. But it is there where it becomes an issue for many, as the trap of confirmation bias begins.
For example, many who already are long-biased will use those sources to strengthen their opinions on why being long company/stock is good. And for those bearish, they will seek for weaknesses in those reports to do just the same on short side. But what the majority miss often, is that product quality does not reflect well in stocks price short term often, nor is the primary driver on tickers movement. To put it bluntly, to think that an accurate price directional thesis can be formed based of minimum data differences (expert vs non-informed industry observer) of news is likely to be a long shot, its not going to happen. If it does, the application will be very rare and meaningless for anyone looking for a robust edge.
In the end reflection of stock price will most likely come from the whole business model itself, and not exactly what one particular news means to the product itself or the details around it. Again, its about the whole context. And if you are getting sick of the phrase "context" by now, make sure to take something for sickness, because there is more coming in upcoming articles. It is that important.
From my observations, most traders or investors should not be reading those sources (on Twitter often) for a very straightforward reason. Very few can deploy them very objectively and well into a trading/investing thesis. For the majority, it only serves as reinforcement of their confirmation bias. YOLO investors will constantly seek exciting stories about the product of the company they are invested in, just to strengthen their reasons why they should keep being invested. And even if they see discrediting stories well proven and explained, most of those will get ignored. People make up their minds what they think of a sector or stock before they even start researching it in depth. "I am going to like this, now let me find info out there why I should like it in first place, after i already made my mind up that i do like it" is often the paradigm. So these services should be used carefully and mostly only by industry insiders and/or those with plenty of experience. With less experience, there are more downsides than upsides to using it. A reinforced confirmation bias trapping mechanism at play.
Therefore be aware:
Understanding a product does not equal understanding a business plan.
Alright so let's clean up this contradicting mess. What we established is that:
-Really strong news are rare (relative to averages).
-Too much excitement for beginners often makes news look stronger than it actually is, due to missing key components.
-Weak catalysts are more frequent but if cycle conditions are strong those stocks can still move a lot.
-In many cases there even wont be any news moving the stock
-Being aware of agenda is valuable, which is where reading the news can still matter for better thesis formation, as some catalysts can be correctly pieced together to get an idea "what is coming next"
-Be aware of the content you are consuming on daily basis (balance it), just like your food diet, make it with mixed content to be healthy.
Contradictions are difficult in trading because the game itself is already hard to come to good enough conclusions that lead us to create informed decisions that aren't just based on guessing. And while this article might be quite confusing as many of the points are contradicted, the idea is to highlight that news and edge around them is not as simple as you might believe. Context can create large variations of behavior on how stocks tend to react to catalysts and it is important to be aware of what the conditions of the context currently are, to define our chances better.