Adage in the Financial Markets: Buy the Rumor, Sell the News

Tom Gentile

Posted in
Big Picture

By: Tom Gentile
June 28th, 2024

4 mins read

Buy the rumor, selling the news is a concept used more often by traders of both stock and options than investors.

This strategy is where a trader buys a security based on speculation that it may trade higher due to an upcoming news announcement or data, and then sells the security once the news is made public.

The same can be done if one thinks the news announcement or data will cause the security to drop. In that case the strategy would be to sell the rumor buy the news, (sell the security short and buy it back to cover). This is a bit riskier due to it involving selling a security short going into the event.

I’ll focus on anticipating the security moving higher on the news and therefor not sell the security short.

Options Can Also be Considered

Instead of buying the security prior to the news announcement or data being released one can consider a bullish option strategy as simple as a Long Call trade.

The thing to further consider if the Long Call trade is the way one wants to go is making sure the option expiration that is out past the anticipated expected length of time the move should take.

The time decay of a call option accelerates faster in the last week before its expiration so if the news announcement or data doesn’t pop the security higher an option whose expiration is at the end of the week of that news or data could suffer bigger losses than anticipated or wanted.

Security Trade or Options Trade?

In either case , whether I go long the security or long a call option, the process I favor in either scenario is to sell the security or sell to close the option after the news or data is released.

Win, lose or Draw that is the typical plan for the ‘buy the rumor, sell the news’ concept/strategy.

The belief is once the news or data is released the reason for the trade is over. One typically buys the security or option in anticipation of the news before most everyone else.

Once the news is out and those who haven’t picked up the security or option may try to start jumping in on it now that the news is out. Maybe they see it getting publicity on the financial news networks and feel they want to now pick it up for fear of missing out on the potential price move higher on the news/data. That’s fine by us because while others are jumping in late I am taking whatever profits may have been obtained.

In a sense you can consider my though process as Buying value, selling hysteria.  When it works it is a nice short-term profit and when it doesn’t I am not sitting around holding this while it drops even further.

That being said it seems the financial markets did buy the rumor sell the news on both the first Presidential debate last night and the PCE this morning.

Nothing earth shattering happen with either, but the fact both happened and is over people sold securities after the pop higher this morning.  They sold the fact the news event and economic data came out and they can now focus on new reasons to trade, (at lower prices than those from this morning).

SPY

Image

The annotation in the image above sums things up simply.

550 is the double top resistance area that SPY needs to clear, preferably on a closing basis, for me to feel more confidence in the markets trading higher from a technical point of view.

The fact the markets sold off after both the Presidential debate last night and the PCE number this morning doesn’t surprise me as I wrote about on the front page.

The key thing now is to monitor a potential support area for SPY.

Different securities tend to react to different period Moving Averages as a support or a resistance.

Securities typically don’t trade too far away from their 10-Day Simple Moving Average (SMA). Case in point SPY is trading on its’ 10-Day SMA at the close of market today.

Tom Gentile
C1P: Chief 1-Percenter

Mod Logo

Special Offer

Join Mastery On-Demand!

Have you ever wanted to join the Mastery Program but couldn’t make the live events? Well this year I wanted to change it up and offer you the ability to learn on your time with our brand new Mastery On-Demand offering.

Choose from a wealth of Mastery Programs including our System Mastery, Hedge Fund Mastery, and Trend Mastery — or choose to get access to all of them with the All Access pass.

App: Toms Option Tools

Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.


Disclaimers

Stock and options trading has large potential rewards, but also large potential risk.

You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.

This is neither an offer to buy/sell/ or recommend a particular stock or option.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.

No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.

Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.

This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.

You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.

Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.

Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.

A full disclaimer can be found here:  http://www.tomgentile.com/legal_disclaimers.html.

Sign Up Now for Free Education!