This Morning’s Headlines Just Unveiled Two “Buy the Rumor, Sell the News” Trades

Editor’s Note: Stocks had a bit of a rocky Monday morning. But Chris Johnson found a couple of trades hidden within the volatile movement. Get ready to buy the rumor and sell the news for some big profits…

The two names dominating headlines today?

COVID-19 and Tesla.

Over the weekend, the UK announced news of a new strain of COVID-19 – news that sent the market on a fast dip lower after opening bell.

But COVID isn’t the only factor that weighed on the market today. Head to any news site you choose, and it seems Elon Musk’s face is above any COVID stories on the homepage.

After Tesla’s addition to the S&P 500, the stock fell more than 5% – an unexpected dip from the company that can’t seem to stop rising.

See, Wall Street got off to a shaky start this week. Nothing quite rocks stocks like negative headlines.

Today’s top headlines may have been bad news for stocks – but I just found a silver lining. Because both of these stories just unveiled their own new trades.

These trades are perfect candidates for good ole’ “buy the rumor, sell the news” trading.

And you can find every detail behind these “headline trades” right here…

Buy the Rumor, Sell the News: Tesla and Pfizer

Health experts are assuring UK citizens that they believe this “new strain” of COVID-19 is treatable by the long-awaited vaccine that’s being distributed as I type. I mean, the headlines have been full of stories about Pfizer Inc.’s (NYSE: PFE) vaccine as it’s raced toward emergency approval the past several months.

Almost nothing moved the market more than news of this vaccine. Remember? PFE rallied 10% in just nine trading days. And then came that long-await approval, and what did shares do?

They reversed almost all of that rally.

It sounds bizarre, I know. But the reason behind this precipitous drop is easy to nail. It all comes down to a trade that I’m always watching for: Buy the rumor, sell the news. And today is one of the better examples I’ve seen in a while.

You see, the market is one of the most efficient discounting machines out there. Each day, millions of investors are looking for the slightest bit of news to speculate on. Over time, that speculation turns to rumor, which is when traders normally step in to bid a stock higher.

Sadly, most investors don’t have the time to sit around and do the research necessary to find the bits of information needed to uncover these opportunities before they turn to “news,” so they wind up buying when that rumor is finally turning into reported news – which is often a poor time to buy.

Such has been the case with PFE. Now trading 20% from its highs hit only a week ago, the stock has become a victim of “sell-the-news” trading. But there’s still an opportunity here…

Let’s go back to my first Commandment of Trading: The Trend is Your Friend.

PFE shares are sitting right at their 50-day moving average as they trade today. In addition, trading volume on the stock is hitting its lowest reading since the stock started this wild ride. According to my experience, it’s time to step in and buy shares for the next ride higher. Here’s why…

That 50-day that’s providing support? It’s rising, which means that the stock is still on a bullish trajectory. My target price for PFE shares sits at $45 – more than 21% higher than where it is as I type.

Next, that low volume signals that the recent bout of selling pressure has run its course, which means that it will take far less buyers stepping into the market to turn the stock around as it prepares for its run higher.

Now, you may have missed the “sell-the-news” action on PFE. But it’s just getting started for Tesla Inc. (TSLA).

That’s right, the newest addition to the S&P 500 is likely to see the same “sell-the-news” trade that hit PFE.

I normally tell people not to short TSLA. That’s because the stock just keeps defying gravity. But in this case, TSLA has more than gravity working against it.

For weeks we’ve seen traders buying up shares of TSLA as the company got ready to be added to the large-cap S&P 500 Index.

On Monday, November 16, it was announced that the electric vehicle producer would be added to the index. Shares rallied 60% in 16 trading days after the announcement, as everyone went crazy trying to jump on the headlines. Then, with little more than a week until the magic day (today, December 21, 2020), the stock got a little wobbly near its highs.

That was the first sign that the stock had run its course on the “buy-the-rumor” rally.

For the last week we’ve watched TSLA trade in a wild range between $600 and $650, only to see shares surge higher on Friday to their all-time highs of nearly $700. That move came on what I call “crescendo volume,” as the daily volume of 223 million shares was more than three times the average daily volume for the stock.

Digging into my database, volume crescendos for TSLA when the stock is overbought – as it is right now – result in an average “sell-the-news” correction range of 13-20%.

Conveniently, a 15% pullback would put the stock at around $500-$550. If you were watching the numbers on PFE closely, you’ll notice that TSLA’s 50-day moving average is sitting at the bottom of that range, and yes, it too is on a bullish trajectory.

Bottom line here is that TSLA’s ripe for more selling. Aggressive traders may want to consider targeting the 15% pullback by buying a slightly in-the-money February put on the stock. Longer-term investors may want to use a limit order to buy the stock at $550.

Speaking of short-term trades – my colleague, Tom Gentile, just discovered one of the fastest ways to make money that I’ve ever seen. Last week, he gave his subscribers the chance to make 25% in three minutes on Netflix.

I asked him if I could share his secret with you, and he said yes. Click here to learn how he does it.

Until next time,

Chris Johnson

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