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Buy the rumor, sell the news

Hey Market Pilots,

“Buy the rumor and sell the news” is a common phrase in trading, but what does it really mean? This may seem remedial to those who know but remember, there was a time when you had to learn the meaning as well.

The stock market is really good at pricing in news and accounting for what is to come in the future. This means that when the anticipated event actually arrives or comes to fruition, those in the know sell it to those who are just now connecting the dots with the “new” information.

Let’s take the recent example of a stimulus talk from Biden last Thursday. The general idea for those new to the ways of the market would probably think that Biden having that speech about stimulus would drive the market higher because that’s bullish news. Instead, what happened is that the market topped and rolled over that day and then fell hard the following day. In this particular example, the drop could also be contributed to jitters surrounding the weekend prior to the inauguration. 

Stepping back, the idea of stimulus has been on the table for weeks. Real investors know this is all but a sure thing and have been factoring it into their buying decisions. Therefore when the actual news, or event, of Biden, talking about the stimulus occurred, it was the confirmation of what was already known.

So buy the rumor means be bullish knowing that stimulus is already on the table. And sell the news is when Biden actually had a press event saying there will be a stimulus. Experienced traders could sell holdings into a news event that would get more immature traders wanting to buy at the news event. Generally speaking, if you are hearing about something in the media, it’s already old and those who will benefit from that media information have already been in, so beware of trading based on news.

Over and Out,

Your Profit Pilot.

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