Educate Yourself - B&H 101 - Buy The Rumor, Sell The News

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Buy The Rumor, Sell The News
by Charles B. Carlson, CFA
Dow Theory Forecasts

The market seems to be taking a breather here following a rapid rise in recent months. One explanation is that investors are "selling the news."

There's an old saying in the market that investors "buy the rumor and sell the news." This notion is usually applied to things like new products or takeovers.

Increasingly, however, investors are also applying this concept to earnings season.

What is happening is basically the following: Stocks now seem to rally into earnings season. The rally occurs because investors, emboldened by their favorite stocks not pre-announcing poor earnings for the quarter, buy up the stocks as a result of no warnings.

Of course, that buying prior to the actual earnings announcement leaves the stocks vulnerable to profit taking once the actual earnings are reported, and that is what is happening now.

In effect, investors are "buying the rumor" (the rumor that earnings, because of no warnings, will not disappoint) and "selling the news" (the actual release of the earnings news).

Keep this pattern in mind come March of this year, just before the end of the first quarter.

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