We read stories in the newspapers. Most investors are new junkies. They are constantly reading the news and looking for new information to support their thinking or developing new ideas. I am not saying this is a good idea. It is just a fact. Even if someone uses a model, there is still the desire for news validation. An understudied area of research is narrative economics which was developed by Shiller. Markets are often driven by stories or narratives which can lead to excesses.
An interesting study has focused on narrative momentum or the fact that investors often under-react to news narrative based on the intensity of news reports. Simply put, investors do not respond quickly to rising narrative intensity. You can gain an edge by buying stocks that have an increase in news intensity. See Narrative Momentum. This would be a failure of the efficient market hypothesis, but it makes sense.
There is an increase in the interest of stock based on narrative intensity. If there is good buzz about a stock will start to rise, but there is a time lag between the increase in the narrative and the reaction in price. It takes time for the narrative to move through the investment community and create enough reaction to drive the price higher. Investors need validation. They take time to react.
If this is the case, there trend-follower who does not follow the news but only prices may have an edge. When the trend-follower see prices increase, he will be a buyer and not look for supporting news. The trend could be driven by a special narrative, but that does not matter. Only the movement in prices matter. These trends exists because the there is a slow reaction to news, but you do not need to follow the news to make the trade.
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