pedigree goes, “Buy the rumor, sell the news.” Stocks often enjoy a good
upward run based on chatter among market professionals regarding forthcoming
news, such as strong quarterly numbers. Often the so-called “whisper
number” circulating among the professionals is higher than the number
that stock analysts have arrived at in consensus based on guidance from senior
executives at the company. Once the actual numbers are announced,
should they come in below the whisper number, then this news hits the
Street as if the chief executive had just announced the CFO had disappeared
after embezzling all the company’s cash—the stock swoons. It does
not matter if these numbers are essentially sound or even good.
Interestingly, even if the whisper number is reached, the stock often
still falls back sharply as those who had bought into it now sell and take
their profits. In both cases, such a drop in a stock’s price inspired by an
announcement (which hits the stock out of the gate at the opening bell,
should the results have been announced the previous evening or that morning
before the bell), can take several dollars off the stock price and bring
it to a level that puts it squarely in buy territory under our trading technique,
so in such cases we are buyers of the news. Typically, following the
initial sharp drop, the stock tends to come back during the rest of the day
as value-oriented investors and traders perceive value and buy. As the day
progresses, the stock often seesaws as traders come in at low prices, but
take profits each time there is an upswing. As a result, the ripple trader can
buy and sell several times in the same day and make a handsome profit.
One good example of this comes courtesy of Nike Inc. (NKE). We
bought and sold Nike twice on December 21, 2005, when it followed precisely
this pattern. Its quarterly earnings were above expectations, but a
relative weakness in future orders was perceived by analysts. The stock
fell $4.48 or around 5 percent at the open and we bought 100 shares for $84
even. It then climbed back up to $84.56 at which point we sold, only to buy
again shortly afterward for $84.31 with a final sale later that day at $84.98.
We made $103 with the stock on that day. Why were investors in such turmoil
over Nike? The quarterly profits announced were 15 cents higher than
the $1.03 consensus forecast. Go figure!
Read More : BUY THE RUMOR, SELL THE NEWS . . . OR BUY THE NEWS?
