Sell the News: Why Marijuana Stocks are Dropping

11:53 10/17/2018

Eugene Fama’s Efficient Market Theory (EMT) taught us that when news is released, it’s immediately priced into stocks. But that’s impossible because it never took into consideration the friction of news flow. “Nothing beats the stock market for sheer frequency of potentially interesting news items,” said Robert Shiller in Irrational Exuberance. News can foster an attention cascade among investors, he says, sending them into herd like behaviors. Following good news and rallies, we may often see positive feedback loops, where investors rush in thinking they missed a run, the media fuels the fire more, more investors move in, the media presses the issue harder. We see it all the time. Then there’s reaction to the reaction and so on and so forth. While the EMT held some weight years back, today is does not. In fact, we’ve disproven it. Three Phases of News Flow Phase 1 -- Anticipation of News Effect Stand at the top of a snowy hill with a small snowball. Now, begin to roll it down the hill. As you do, it begins to become bigger and bigger. It begins to build momentum. Well, the same thing happens with stocks. If we can spot a potential story ahead of the herd, we can take a position and wait. We can get a jumpstart with our snowball. Then, as they begin to wake up to opportunity, our snowball gets bigger and bigger and picks up momentum.

This article has been provided by a Chasing Markets contributor. All content submitted by this author represent their personal opinions, and should be considered as such for entertainment purpose only. All opinions expressed are those of the writer, and may not necessarily represent fact, opinions, or bias of Chasing Markets.
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