By teclontz on Thu, 12/23/2010 — 10:15

Mike often notes that you can’t trade the news. There are plenty of reasons for this (and this is by no means a complete list):

1) The smart money already knew the news before it was published.

2) Sometimes smart money is advertising what they want to sell to you (so they can unload it).

3) Newswriters don’t want to look like idiots, so they tend to write justifications for what has been happening, rather than divine what will happen next.

I could go on (and feel free to add to the list).

In any case, I was reminded of this when I saw this article about computers being programmed to trade on the news! While it would probably add to volatility, I think it will create more opportunities for intermediate to long term traders, as well as fundamental investors. A buy point is after a dip in a long term trend, and a good fundamental buy is a company whose stock has been going in the wrong direction versus its finances.

I think that the trick for us, though, is to remeasure our buy and sell points. Since computers are being trained on those same points, those points are more and more frequently getting stopped out just before a reversal. We’ve experienced this ourselves this year — seeing stops getting taken out just BEFORE the reversal.

I don’t know about the rest of you, but I can’t outrun a computer. I CAN, however, invest in a SLOWER time frame, and adjust to filter out the noise created by these algorithms.

What I’ve been doing is to select long and short positions based on fundamentals and just suffering through the invariable experience of good bargains becoming better bargains before the stocks turn around in my direction. That may not be the best answer, but it is ONE answer, and it’s working for me. While I’ve gotten a lot of flak (some of it justified and some of it just silly) about being on the wrong side of the market, I’ve been remiss in sharing my tolerances. Right now, at 2/3s short and 1/3 long (net 1/3 short) I’m only losing money when the S&P gains more than .25% in a day. That’s my fundamental answer to these technical algorithms.

But I’ll freely admit that short term I get hammered on the average position. My shorts go up for a while after I enter them, and my longs go down for a while after I enter them. If I change my positions by more than 5% in a week I’ll regret it for a month down the road. These things are great FUNDAMENTAL picks precisely because they are crappy TECHNICAL ones.

But I’d love to merge the two together.

My goal for this year is to try to marry the two in a better way. I have some ideas, and I’m open for others.

For the new year, I’m curious, how do YOU balance technicals and fundamentals?

My way (which is not the best by any means), is to do technicals on the broad market and pick individual stocks on fundamentals, regardless of the technicals. For a quarterly investor, that would be disaster. For a year to year investor it works.

But wouldn’t it be great to have something that works in short AND long time frames?

Ideas? How do you outslow these computers?