Should value investors make use of news alerts?

At 4:47pm on Monday, 3 October, Bloomberg flashed an alert – “Henderson Group News Demand Jumps; Stock Little Changed”. Fifteen minutes later, the $US6 billon merger of Henderson and Janus Capital was formally announced. It was a reminder of the power of big data analytics for share traders.

The Bloomberg announcement (see below) was an automated alert, triggered when more people than normal were searching for news concerning Henderson on a day that was relatively quiet. Quite the coincidence, wouldn’t you say, given the announcement after the market closed?

This alert is pretty nifty, simply to demonstrate the potential applications of big data. Since global financial markets are connected via Bloomberg, it’s become a rich database to not only glean patterns from both human behaviour and market movements, but also identify these trends in real time via algorithms.

But let’s break down what this particular alert could mean for value investors.

First, it could very well be a coincidence that more people than normal were searching for news about Henderson on the day before it made a market sensitive announcement, in which case we’d conclude the alert was noise.

Second, while the Bloomberg alert claimed that the stock was “little changed”, it actually closed up 4% on the Monday on no news. While this movement would not be unusual, it could prompt many participants to search for reasons to explain this movement (whether the stock was up 4% on private information is another story). So here again, the act of searching for news on a volatile stock would not be a signal of itself.

But what if people did in fact have inside information of the deal and were acting on this information in the market? Would these same people be the ones searching for news on Bloomberg? Unlikely. But it is possible that news was leaked to outsiders, who could then search news sources to confirm rumours before acting. So perhaps there could be a signal there.

These alerts could benefit market participants that seek to profit on volatility. But for value investors, all we would have gleaned from this alert at the time was that more people than average were looking for news on the company. Even if this was a signal that an announcement was pending, we could not discern if the signal was positive or negative (it could be just as likely that more people than normal were searching for bad news).

This isn’t to discount the power of machine-driven algorithms for value investors (particularly given the potential we see with the Montgomery Alpha Plus Fund). But in this particular instance, we’d conclude that it was simply interesting to see news demand for Henderson spike just before a sensitive announcement.

The Montgomery Funds own shares in Henderson.

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 16:47 – 3 October 2016

Henderson Group News Demand Jumps; Stock Little Changed

By Bloomberg Automation

Interest in news about Henderson Group Plc was unusually high while the flow of information about the company was no greater than average.

Reader interest was at the highest level compared with the 30-day average based on Bloomberg measurements of the number of times people call up news stories or search for articles on a specific company. News flow gauges the amount of stories being published on a company relative to the previous 45 days.

Henderson Group shares fell 0.3 percent in the last session, the same as the FTSE 100 Index. Trading volume was 60 percent more than the daily average of 1.7 million. The stock is down 1.6 percent in the past week.

Implied three-month volatility was 49.6 percent.