There’s an old market adage that says, “Buy the rumor, sell the news.”
Simply, it means that short-term traders should buy the stock of a company on rumors of catalyst events that would be beneficial for the company, such as acquisitions or new product launches.
As excitement for the event rises, so too does the stock price as investors pile in. Traders then hold their shares until shortly after the event (the “news”) occurs.
It’s a fairly basic strategy, but one that can yield big returns. Let’s use Apple (AAPL) – a company that has had its fair share of exciting new product launches over the years – as an example…
It’s fair to say that the Apple iPhone was the first of its kind. Sure, earlier iterations of “smartphones” had been sold in years past, but none with the full suite of capabilities of the iPhone.
From January 9, 2007, the date Steve Jobs first introduced the world to the iPhone, until its release date on June 29, 2007, AAPPL stock rose from $10.75 to $15.41 – a 43.34% increase.
Well, as with many “news” events, the reality often doesn’t live up to the hype. In fact, AAPL shares only gained seven cents on the day of the release, as sales numbers initially disappointed.
There are a litany of other examples of shares disappointing after the company’s big “news” day because reality didn’t meet up with expectations – something I like to call a Reality Gap.