by Peter McKenna

Event Trading is a way to flee from Wall Street, to become independent and self-reliant.  The only way to recover bull market losses, in my opinion, is to find a way to make good money in a short amount of time while keeping risk to a minimum.  That is the alternative offered by event trading. It’s for those who are ready to leave the Wall Street “experts” behind.

We cannot know exactly how much damage was inflicted on our economy by the collapse of the bull market.  It resulted in a loss of wealth that may have knocked the business cycle, and thus the stock market, badly out of sync.  In past decades, the business cycle has produced longer and longer periods of expansion followed by shorter and shorter contractions in which wealth is digested and redirected back to the economy.  Redirected wealth helps pull the business cycle up from the depths and ignites a new expansion.

This time, much of the bull market was not put back into the economy.  Investors who took profits of their tech stocks were impulsive rather than prudent.  Flush with cash before the bubble burst, they bought new cars and vacation homes and $50,000 bottles of wine instead of reinvesting their profits.  Capital that should have been used for future reinvestment in the economy is now gone.

The same pattern appears to have taken place in corporate America.  As the tech bubble grew, cash-rich corporations borrowed freely and spent freely, taking on unreasonable amounts of debt and expanding their operations to handle business that now does not exist.  The money they had to reinvest in the future is also gone.

Some economists believe there is still more than enough money available for reinvestment and see nothing to fear.  Others believe the economy has been badly damaged by bull market excess, and see nothing ahead but stagnation and dismal market returns.  The economists with the optimistic view tend to be those tied to Wall Street, those who collect paychecks or consulting fees from brokerage or research firms.  The pessimists tend to be independent, free from ties to the traditional ways of doing business.

No matter which view you take, the following is inescapable: The period of economic expansion that began in 1982 was the longest in our history.  It was capped-off by one last insane upward run, called the bull market.  It was as if the economy had partied every night for years and ended with a four-alarm riot on New Year’s Eve.  Long, powerful expansions can, of necessity, be followed by long, painful contractions.

The Event-Trading Strategy is Anchored in the Following Concept:

Wall Street is no longer inflating the price of stocks; the scam is over.  This does not mean that stocks have suddenly become good investments.  The price of a stock is based on a company’s current and future earnings.  Earnings, in turn, can grow only if the economy is healthy.  But our economy may have been so badly damaged that sustained, widespread earnings growth is not likely for many years.

In the meantime, we are destined to go through a never-ending series of false starts.  When a company releases better-than-expected earnings, Wall Street will boost stock values and the market will briefly become euphoric.  When an economic indicator is released that shows the economy is doing better than thought, stock prices will soar.  Then a few days or weeks later another news event will bring the market back to earth.  A company will release worse-than-expected earnings, or an economic indicator will fall far short of expectations, and gloom will set in as the Street sends values back down.  This is a classic, choppy, go-nowhere bear market.  Wall Street will value a stock at $20 one day, and $10 the next.

Who in their right mind would buy and hold stocks in this environment?  Would it not be far better to take advantage of the one market process that will provide a quick, reliable way for small investors to recover their losses?  I am referring to the way economic news and world news causes Wall Street to constantly re-value stock prices.  As we have said, when the right kind of good or bad news occurs, or when dramatic world events occur, the market gets the boost it needs to briefly move up or down dramatically.  Investors for a few hours believe they have a chance to make money or lose money, so they buy or sell with abandon.  Event trading exploits these frequent bouts of euphoria and gloom.

Today, you can buy stocks and hope their value grows over the long term, or you can harness the explosive power of the market and world events to drive stock prices.  Again, the theory behind event trading simply says that, under certain important conditions, an oversold market that gets better-than-expected news has nowhere to go but down.  The key to trading events is the expected/unexpected nature of news and the level of conflict and uncertainty in the market when you make the trade.  The market reacts not to news itself, but to the better-or-worse-then-expected nature of the news.  If the GDP is expected grow at 3%, for example, but it comes in a full percentage point less at 2%, the market, under the conditions outlined above, will react violently downward. The market’s reaction to news will never go away.  It creates an opportunity for knowledgeable, alert traders to predict and capture the market’s greatest upward or downward moves of the year.  To make these predictions, event traders must first learn to make sense of earnings and economic news announcements and market conditions.  With this knowledge, you will understand why waiting for the right event at the right time is an absolute must.  Knowledge and patience are the event trader’s best friends.