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 QE3 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 QE3 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 probably happen until the end of time. 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 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.
- Sell the news when the public gets involved. Joe Kennedy sold all of his stock holdings in 1929 when the shoe shine boy was giving him a tip to buy a stock. The same thing happened in 2000 when taxi cab drivers were trading stocks on a lap top from the passenger seat. In 2005, the public was buying real estate using sub-prime loans in order to flip the property for a quick profit. We all see how that ended.
- Sell the news when the price of the stock is very extended from the major moving averages on the charts. If you ever see a stock that has soared higher before a major announcement and is extended from the major moving averages on the chart there is a good chance that this stock will be a sell at the news event. Charts will tell you more than you will ever imagine so learn to read them, especially before major announcements.
- Sell the news when the masses in the public say that price will never go down again. In fact, this happened to Apple Inc. (NASDAQ:AAPL) in September 2012. At that time, the stock traded above $700.00 a share and was very extended on the charts. The financial news network CNBC also showed people in the public that said their life savings was only in Apple stock. Many of the people interviewed also said that the stock would never go down again. You can see that Apple was experiencing all of the classic sell-the-news topping signals. As we all know, the stock declined from over $700 a share down below $400 a share in the next eight months.