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Does Headline Risk Matter?

Updated: May 30

Every day we read about and hear about major headlines and how they move the markets

We are constantly warned to be careful of headline risk. While it's clear that events can trigger our sense of fear and greed and cause us to react, do these events really cause substantive changes in the market dynamics or are they being used to manipulate us?

Headline Events used to Justify Moves

Most of the headline events we hear and read about are used to justify what is happening in the market. Given human nature and our need to make sense of the world around us it eases our anxiety if we can explain what is happening. Unfortunately the markets are an extremely complex amalgamation of many related and disparate events. There is seldom a single reason that justifies a price move across the major indices.

“Prices fall while Fed considers rate decision ahead of FOMC meeting.”

To illustrate this point just think about market reversals. The media justification for the intraday trend can't be valid before and after the reversal. What changed? Certainly not the macro conditions. There are other forces at play which involve trading algorithms set based on where price is in relation to the Expect Moves sent by option traders.

Headline Events that Cause Moves

There are certainly some headline events that do cause the markets to react. These are generally relatively few and typically are embargoed news such as government economic reports which are unexpected surprises.

“PPI Shock: Wholesale prices rose 8.8% in March, near a record annual pace. Analysts forecast 7.2%”

It is these type of events that can become "non correlated exceptions" to price conditions. These are defined as price movements that don't follow the standard correlation coefficient or a standard exception correlation (i.e. overbought/oversold condition) . Headline events that justify price moves typically do follow the standard correlation coefficient, meaning the price behavior falls within the historical probabilities.


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