Buy The Rumour, Sell The News
When Trading the Markets, we often have to acknowledge the many different styles that are adopted all over the world… we know there are Fundamental guys, we know there are Technical guys and we also know there are News Guys… wherever you are, and whatever your style is, I acknowledge that each style has an ability to move any given market.
Many Traders are caught out on the back of VERY public announcements by company ABC, quite often there are strong rumors in the build up to an event which will drive the stock price up, and then once the news event hits… the market will take profits… this is essentially what Buy the Rumor and Sell the News is… it’s often a short term counter move against price triggered by lots of selling, and when this starts to take hold, we have to be mindful of what is ACTUALLY happening.
Can it sometimes be at the expense of taking a small loss?…. absolutely, it’s not particularly pleasant when it happens, and the situation can also be magnified by an overall market sell off, which adds even more fuel to an already developing fire.
For example, this weekend, I given a chart to my clients that showed a very real danger in Tech… the warning sign was there for all to see, and ultimately this has helped to drive the Market down across the board today (12th November 2018)… and since I highlighted the potential reversal of price around 2 weeks ago, the market has performed very well… but it’s also about understanding what is going on NOW and it’s not about how the Technical’s looked 2 weeks ago.
The current market environment does not support those that have a 1 dimensional mindset, and it doesn’t support those that can’t adapt. It’s a tough market to perform well, and it requires a tight leash on all positions. Gone (for the moment) are the days where you can just buy and hold, you need to constantly re-evaluate your thesis because the market is changing, and it’s changing daily. Standing aside is absolutely a valid tactic right now.
So if we were to take an example, and lets just use Apple for a second.
Let’s say Apple announce a new product launch… rumors about the most incredible iPhone ever created, coupled with ground breaking technology and massive hype… a lot of Investors will jump in and “buy the rumor”, this has the knock on effect of driving in momentum traders, and price will usually rise until the day of the event… which is nice if you’re in the trade.
The downside I hear you ask?
Ultimately what happens, after the event, no matter how good the announcement is… the stock then sells off, which drives price down… all the momentum traders of the world use this strategy to profit, and ultimately get in and out quickly… and if you are in the position prior to the news event, and you’re caught in the middle of it, it’s often unpleasant.
So if we take the above chart example of Tech… if we have a news event over a weekend, and we have a break down looking imminent in Tech, it just makes sense that we would have a bit of a double whammy, and things can often look worse that it actually is.
The example that also comes to mind this weekend is Amarin (AMRN)… a stock that I have been bullish on and in for quite some time, and said in 1 of my weekend emails that it would be interesting on Monday... that’s been an understatement.. (2 x 15% swings pre-market) and a 10% recovery intra-day….
On Friday, I was made aware there was a news event over the weekend with Amarin, as it transpired, they announced to the world that their product was going to change the game for heart disease (you can google the news)… as someone who has a position in AMRN, naturally I was delighted… waking up to Price Target increases from all the Investment Banks… bullish sentiment… I was already planning the holiday home in Croatia …things were looking good… I’m enjoying a wee party in my head, but wait… why is price declining? why isn’t it going up? What’s going on? Noooooooooooo!
Buy the Rumor, Sell the News coupled with an overall market sell off is the answer.
It’s both frustrating, and annoying (because it doesn’t always happen)… but yes, I’ve been caught out by Amarin and Sell the News for the 1st time in a LONG time, but it’s no problem, it’s the dance we all play… I’ve allocated risk correctly, and I’ll move on if I’m triggered out the trade, I’ll be pinpointing the next entry because I always understand that I’m never marrying stocks, I’m only dating them and I also understand the concept of Tree Shaking.
If you’re interested in education and you struggle with your trading results… we’d love to hear from you.