There's an old adage in trading, "buy on the rumor, and sell on the news."
Most often, news and earnings reports have already been factored into the markets. The people who are aware of this information have already taken the appropriate action. These people do not include the general public. Individual self-directed traders tend to receive their news through the normal channels such as CNBC, The New York Times, The Wall Street Journal and the web. News by nature is a recap of worthy events, therefore the news tends to be old and comes too late. By the time these news stories are written and make their way from the TV or printing press to your eyes, the markets have already made their move.
The concept of buying on the rumor and selling the news is correct the majority of the time. However, there are always exceptions to the rule. Recently was earnings surprise that came out on Apple (NASDAQ_AAPL) on the 21st of January, 2009. Apple blew it out of the box and surprised many with its strong earnings, most of which came from overseas.
Only by following the market action can you have a handle on what's going to happen in the future. A recent example of this is eBay, I just finished a video on eBay a few days ago that I recommend you watch. It is a perfect example of market based price action predicting the news. When the news came out on eBay having its first quarterly loss in its history, it sent the stock down over 10%. I can't think of a better, or more recent example of market action predicting the news. And yes, it was a profitable trade for our MarketClub members.
My hope is that this blog posting will help you understand how professional traders use the news... but not to watch, just to sell.
Every success in life and in the trading,
6 thoughts on “If you're trading on the news, you're already behind the eight ball.”
Great post. I couldn't agree with you more.
Thanks you feedback. We all like a pat on the back every once in a while.
Rumors are the mothers milk of salemen,oops,brokers. When you hear of a hot stock, due diligence is called for. Check earnings, cash flow, price changes and PE over several months. When you see a lagard suddenly take off in volume and price increases, beware the bump. Soon you will see a gradual slowing of volume and a retreat in prices. Now is the time to get in, after the dump. Not long, but short. I prefer puts with a stop loss. Amazing on how you can profit from rumors. If, by chance there is real news, the same procedure applies. The early birds will be taking profits and prices will usually fall.Like vultures, you can feast on somene elses kill.
Thanks for taking the time to comment. I appreciated you taking the time.
Every success in your trading strategy.
Adam, I do respect what you're saying (and your experience). I wondered many times how is this possible (to price in lots of 'news')? The thing is news is reality and it might be that the pricing was wrong; what can we price? Expectations; when the news comes out, it might be 'in-line' with expectations which should create smooth developments. But if the news is much worse, as it happens these days quite often, we see big moves.
Let's take an example with Lehman; the market cheered back in May 2008 the fact Lehman raised money even if they "didn't need it?!?!"; the Lehman stock skyrocketed 20% a day. That means market priced in what's coming for Lehman (they might be saved). Right? Wrong; 6 months later they were out.
I see this adagio 'buy the rumor, sell the news' rather like 'there is some interesting rumor, let's buy and we'll digest later; if later we realize the reality is different, we sell-off'.
I must say that I'm just an amateur in financial markets but these things proved many times wrong (things started to crater down in October the day Congress approved TARP, and not the day Lehman failed as everybody is ventilating today). The markets don't know what's coming, they didn't know back in May, they didn't know in 2007, etc. etc. Some actors knew, but the markets moved irrationally and IGNORED the hosing bubble since 2006.
Sorry for the long post 🙂
Thank you very much for your feedback. That was a great and detailed commentary.
The big thing in the market is perception, this trumps all other items and is what drives the market to a large degree. You can look in this blog and search for perception. We have several blog postings on this subject.
All the best,
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