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.
Now, you may be asking yourself, “The iPhone was an incredible success, why would I sell shortly after the release date?”
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.
And tomorrow could mark one of the biggest “sell the news” days in years.
That means that the market has priced in a deal that is heavily tilted toward good outcomes for both the U.S. and China. Rumor already has it that the really tricky issues about Chinese state subsidies and theft of U.S. trade secrets will be dealt with later, after the U.S. presidential election.
Exactly how much is being kicked down the road will be key. It’ll decide whether traders think the rally since December is justified, or whether they better take their profits now.
It’s all about the reality gap between expectations on the one hand, and the truth on the other.
This means the market could react negatively tomorrow. When traders have to deal with the actual concrete details of the trade deal rather than their idea of it, they may well decide to instead take some short-term profits that the rumors of the trade deal helped to create.
“Buy the rumor, sell the news,” as the old Wall Street saying goes.
For you, in the very short term, that means keeping your trades on a short leash. Rein in your riskier trades for a bit and focus on stocks that will be less affected by trade with China if you have to put on a trade before the details of the deal are announced.
Here are three ways to play this. Last fall, when the trade troubles were slamming the market, then jamming it back up, then slamming it again, Stealth profits traders made money on both sides of the deal by buying calls on Apple (AAPL) and puts on Deere & Co. (DE). On the next tariff tantrum pullback, the DE puts made a 100% gain and the AAPL calls did not drop enough to hit their contingency exit. Then, on the next leg up the AAPL calls hit their 100% profit target. That would be one to play the upcoming news, though with a higher risk profile.
A second way to play this is to buy a stock with no China exposure. Southern Company (SO) is a strong utility that makes all of its revenue in the U.S. and is a “flight to safety” trade that has made 100% gains for us this year.
A trade that our Betaflow traders have cashed in twice for 100% gains is BAC, which has little direct China exposure. If we do get a “sell the news” pullback, buying shares or call options on this strong bank would be a good way to play the rebound.
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Great Trading and God bless you,