Event-Driven/News Trading Journal

L

lakeshow

The goal of this journal is to detail all event-driven/news trading ideas. Positions can be held overnight if necessary. Technicals may be considered, but the focus is to take trades from the analysis of an event or piece of news.

I welcome comments and criticisms, and invite the community to also post event-driven trade ideas we can consider.
 
I'll start off by discussing a trade that has been in the works since last week. Going forward, I hope to document all trade ideas before the events conclude.

At the close of trading on March 11th, it was announced that the Nikkei 225 would be adding Uny(8270) to the index at the close of March 25th(Japan time). The add/delete was actually 3 names out, 3 in. However, the 3 names leaving would all be re-entering under different corporate structures(one merger, one holding co, so 2 total). This left room for one new name to enter, and Uny was chosen.

Estimated passive demand ranged from 9-13 days ADV. To get a feel for how this event might play out, one need only to look at 3086 JFront and 3436 Sumco, which had joined the Nikkei late last year.

The trade would be to enter long 8270 a few days to a week in advance of the actual inclusion, and look for passive demand in addition to hedge funds/prop desks playing the event to push the stock higher. The stock already went limit up the day after the announcement was made. This had not happened in previous cases I looked at, so I was unsure if much of the steam would remain. But nevertheless, the trade still seemed viable.

Uny threw in a curveball by announcing at the close of Mar 17th that they were cutting profit estimate by 82%. This was sure to bring out sellers and it did early in trading the next morning. But the artificial demand continued to push Uny higher.

So the closing prices and respective dates of importance:

3/11 764 (at close announcement of inclusion made)
3/12 864
3/17 857 (at close profit forecast cut)
3/18 900 (stock trades 3.8% lower from previous close early in day)
3/19 891
3/21 927
3/24 931
3/25 traded high of 966, currently 938

Fundamentally, Uny should be much much lower than where it is currently trading. Hedge funds are likely selling into today's passive demand and getting short. Uny should fade badly over the next days/weeks. I actually have searched to put on the short side of this trade, but I could not find a broker for US-based accounts to offer shorts on Japanese securities.
 
Event: S&P 500 to add HCP Inc., change to take effect at close of March 31st. HCP is replacing Commerce Bancorp which is being acquired by TD Bank.

Also CC will be removed, and Philip Morris will be added, but I will not focus on these as Philip Morris is currently only trading "when-issued."

I estimate $1.2 trillion in passive money tracking the S&P 500. We may see minor changes to market-caps, divisor, etc. but I estimate passive demand for HCP at 22 mln shares, maybe 10-12 days ADV.

7.1 mln shares traded today, closing +1.37 from Friday's close(stock had already started moving in afterhours on Friday).

Currently flat, considering long HCP and exiting on the 31st.
 
excellent journal, looking fwd to more. i've seen a number of academic papers showing abnormal returns related to index inclusions/exclusions. guessing there are institutional players in this strategy still, though competition might have affected returns.

have you considered hedging for this strategy? maybe something basic like finding the highest correlated index or stock and using it as a hedge.
 
Updates:

8270(Tokyo Stock Exchange): Still think it has a lot more to the downside, but don't have access to short. Closed @ 958 on 3/25, closed at 933 on 3/26.

HCP: Announced they will issue 12.5mln shares to accomodate some of the index fund demand. I still estimate almost 10mln shares need to be bought by passives, but as 7mln shares traded on the 24th, 4mln yesterday, and already 1.7mln today, I will not be pursuing this trade any longer. I admittedly got lucky, as I had a limit buy order at 32.90 that was filled in the morning, woke up and saw the news on the new share issuance while price was up to 34.30s and sold out position there. I would have thought this news and weak market would have capped the stock from making any move to the upside today, but I'll take what I can get. From a simple look at the chart, it appears even with the remaining passive demand, there is a fair amount of resistance at 35ish. In fact, should the stock be trading around there at the conclusion of this event, may consider going short.

Looking at a few other index plays but as the names are very illiquid, will need to examine in more detail. Also hope to post details on other upcoming corporate actions, earnings, etc.
 
Quote from lakeshow:

The goal of this journal is to detail all event-driven/news trading ideas. Positions can be held overnight if necessary. Technicals may be considered, but the focus is to take trades from the analysis of an event or piece of news.

I welcome comments and criticisms, and invite the community to also post event-driven trade ideas we can consider.
More...
This strategy actually requires brains unlike others (blue line crosses red line). Good Luck!
 
lakeshow,

how much experience do you have with this type of trading i.e. is it something new for you, or have you been successful with this in the past?

I don't do any news/event related trading, but I did have a small amount of money invested with a group that traded stocks with positive earning surprises. The system did well for a few years but then totally collapsed last year and gave back all of the prior years gains.

This could be a very interesting journal - good luck.

Slave2Market
 
Yeah, I'm automating blue and red line stuff currently. I used to study strategies like this threads' one and am looking forward to the time when I can get back to it... it was a lot more fun really. For daytrades I had news software all up and running with companies sorted by fundamentals in tabs, when a headline popped up I could tell a lot about the company by what tab it was in, I could jump on news stories instantly.
 
I have institutional buyside experience with Asian equity markets, so I have a better idea of how things react to news/events over there than the States.

There's only so many events one person can track, analyze, and trade. Big events don't happen that often though(index rebalances, adds/deletes, major corporate actions(i.e. look at how and why 8603 Nikko Cordial traded the way it did last year before being acquired by Citi) but hedge funds and prop desks do put on size on these trades. That leaves quick(often intraday) punts on earnings, eco data, dividends, stock recalls, miscellaneous news to fill in the gaps. Yes, hedge funds and prop desks do play these, but I don't believe they are primary activities for a desk.
 
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