Markets

News-driven stocks provide opportunity for day traders

R. Yegya Narayanan Coimbatore | Updated on August 18, 2011 Published on August 18, 2011

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Fast reaction in market tends to put clients in a disadvantage





News driven day trading, which gives an opportunity to the punters to drive up or down a stock depending on the information about the company concerned, seems to be coming in handy for day traders to make some money even on days when the markets are in a turmoil.

It is common for day traders to go for short selling when the market mood is down — as it was today when the Sensex tanked nearly 400 points. But stock-specific action will work when there is stock-specific news.

The belief seems to be that news driven movement of stocks is a sure bet in that the stock would move only in one way, at least for a significant period of time, and would not catch them off-guard, hastening closing of their positions to trim their losses.

Another major advantage of acting on news to trade in stocks is that as the punters feel that it is a sure bet, they could go for larger order size, in the belief that their profits would be that much higher and they could quickly get out of the counters before any correction — upward or downward — sets in.

In recent days, the markets have witnessed at least two counters having seen a phenomenal increase in the trading volume because of adverse news offering day traders an opportunity to hit a jackpot.

Exit time

This morning, Educomp Solutions, which yesterday announced a tie-up with Sri Kanchi Kamakoti Peetam for a 100-school chain, began trading on a confident note. But when news about an income-tax raid on its premises broke, the stock began a downward spiral and for nearly an hour it remained depressed, losing about 10 per cent of its value, offering ample opportunity for traders to indulge in volume trading in the counter.

An idea of the frenzied trading the counter witnessed could be gauged from the fact that by 1.20 pm on the NSE, Educomp registered a trading volume of 52.85 lakh shares and was quoting at Rs 231.60, a loss of 10.02 per cent. In fact this was a small recovery since the share from a high of Rs 264.80 had fallen to Rs 220 before making some recovery. But the fall of nearly Rs 44 in share price before recovery had set in offered the investors enough time to exit from the counter. By close, the trading volume in Educomp counter surged to 73.34 lakh shares in the NSE with the share closing at Rs 235, an 8.70 per cent loss.

Another stock that suffered a similar hammering because of negative news in recent days was DLF, which was slapped with a hefty fine by the Competition Commission of India for unfair business practices.

There was frenzied trading in the counter that saw substantial volume of trading on Wednesday, with the share down by about 6 per cent in both the exchanges. But today DLF made a recovery and in the NSE the volume of trading in the counter was a staggering 1.32 crore shares.

Another case was that of IVRCL Infra that came under bear hammering after putting up a poor first quarter results that saw the stock shed nearly 19 per cent of its value on Tuesday.

There is a difference, though, in these cases. In the case of IVRCL, the Q1 result was declared on Saturday and market opened only on Tuesday. Hence most of the traders were prepared for action before trading began.

But in case of Educomp, the news of the raid was broken by TV channels during trading hours today and it needed some quick thinking by traders to take advantage of the news.

Speaking to Business Line, Mr Jose C. Abraham, Managing Director, Fortune Wealth Management Co India (P) Ltd, Coimbatore, said news driven trading was present in the market even earlier. But in a bear market any adverse news is immediately seized upon; whereas in a bullish market it may not get the same notice.

Generally, it was the traders who are glued to TV channels during trading hours, taking advantage of such news flow. Brokerages do not alert their clients usually because even before they could do so, the markets would have reacted to the news.

But this required some knowledge about the companies, their performance and the likely impact of any news on the stock price.

He cited the case of SBI which came out with disappointing Q1 numbers. The stock, instead of falling, moved up, even if slightly. Hence even adverse news will not always have a negative impact and an unwary trader may be trapped.

Liquid bets

Mr Abraham admitted that generally day traders concentrate on very liquid stocks that enabled easy entry and exit.

On the list of 10 most actively traded NSE stocks today, only DLF made a gain with the rest of the 9 stocks losing value — of which ICICI Bank and Axis Bank shed more than 5 per cent of value. But in news-driven stock trading, this may not always be the case.

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Published on August 18, 2011
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