Researchers at Harvard, Yale and Chicago have examined how the markets react to the information of news using text mining techniques. They look at stories on the Dow Jones Newswire service going back to the 1980s through to mid-2017. This analysis leads to insights on how quickly news is reflected in stock prices and the key terms, both positive and negative, to watch out for as a stock investor.
The Best And Worst Headline Words For Stock Prices
The report shows the best and worst words in reporting for short term stock-price movements over the next few days. Among the words in news reports that can drive share prices higher over the next few days is the term repurchase. This perhaps isn’t surprising as companies buying their own shares can not only directly create buying pressure for the shares directly, but the ability to repurchase also signals financial strength and board-level confidence.
Other notably positive words associated with stock price strength include surpass, undervalue, tender, beat, upgrade, jump, climb and surge. However, there are some more curious terms too, such as discretion, customary and reconnaissance where the link to increasing shareholder value is perhaps less obvious but a correlation exists with positive terms.
The Worst Terms
On the negative side, you should be nervous if you own a stock that sees headlines featuring terms such as downgrade, auditor, shortfall, slowdown, tumble, hurt, blame or plunge. These are the terms that are then associated with negative price reactions over the coming hours and days. There are less surprises here with the negative terms being mostly as you would expect, namely bad news driving stocks lower.
Speed Of Assimilation
How long does it take the positive news to be reflected in stock prices? It appears to take about 2 days for positive news to be fully reflected, while negative news can take around 3 days.
Interestingly, it appears that stocks move relatively little in the first 30 minutes after news is released, so the market isn’t quite as quick as some might expect, or at least it wasn’t in 2017 when the study’s data-run concluded. The data suggests the market might be efficient, but it certainly isn’t instantaneous.
However, stock price volatility matters too. A historically more volatile stock, moves more in response to news. Interestingly it also takes longer for the news to be fully reflected, typically up to 3 days. Less volatile stocks see smaller stock price reactions, but incorporate the news quicker, often within a single day.
Another major challenge is discriminating between fresh and stale news. A fresh and a stale headline may appear the same based on text context, a stale headline has little impact on stock pricing whereas fresh news is more informative for stock price movements.
It’s interesting to note that news isn’t actually that evenly distributed over time. There’s less relevant news when the U.S. markets are open. There’s a spike in news in the morning and then a much larger spike in the afternoon, but a lull both when markets are open and outside of these peak morning and afternoon slots.
From a calendar perspective there is noticeably less news around holiday periods such as Thanksgiving, the Holiday season and the 4th July and, perhaps predictably, more news associated with quarterly earnings season. Using machine learning is helpful because there are about 400,000 articles a year to process.
A High Turnover Strategy
One issue with news assimilation strategies is that they are necessarily high turnover. If the news is incorporated in stock prices within just a few days then you must trade frequently to stay on top of new news and keep your portfolio up to date. However, the authors find that their strategy produces positive returns even after these trading costs.
The study period ends in July 2017, so it is unclear if these strategies are still valuable today, or if they are now more broadly emulated reducing their returns 4 years later. Still, if you see a repurchase headline, and its truly new news, then it may be an opportune moment to buy. Equally, any headline mentioning an auditor and it may be time to head for the exit.