How many times have you heard the saying, buy the rumor and sell
the news? What this saying really means is that the good news is
already factored into the price of the stock at the time of the
announcement. Just think about how often we have seen companies
report terrific earnings, only to see the stock price decline
sharply after the earnings announcement, it happens all the
time.
Here is a slightly different example, do you remember the Federal
Reserve announcing its $85 billion a month QE-3 program in
mid-September 2012? The major stock indexes were soaring into the
day of that announcement. As you all know, the stock market staged
a two month correction after the announcement. Obviously, the
secret here is not really a secret at all, the institutional money
just figured that all of the good news was baked into the cake
already. Remember, before the QE-3 announcement the stock market
indexes were surging higher on the anticipation that the central
bank would continue its easy money policies. The stock market
institutions love low interest rates and easy money, so when
the announcement was made that the easy money policies would
continue from the central bank, the institutional investors locked
in the profits. This "buy the rumor sell the news" cycle has been
happening for hundreds of years, and will happen until the end of
time if you ask me. It happens in all markets, not just the stock
market. How often have you seen the latest fad or craze with a pair
of shoes, designer pants, or latest electronic device? Once
everyone in the public owns those products they become out of style
and the price drops dramatically. Well, the stock market works the
same way. Below are three ways that you tell when you can sell the
news.
Nicholas Santiago
InTheMoneyStocks
