Buy the Rumor, Sell the News: Key Takeaways
- Stocks often spike on rumors and fall when news is confirmed…
- What you must know about how the market accounts for new information…
- Why the ‘buy the rumor, sell the news’ strategy can become a self-fulfilling prophecy…
With the buy the rumor, sell the news strategy, you try to stay ahead of the market. That’s where you want to be to lock in safe profits.
Table of Contents
- 1 Buy the Rumor, Sell the News: Meaning
- 2 Why Buy the Rumor and Sell the News?
- 3 Buy the Rumor, Sell the News Strategy
- 4 How Do You Find Stock Rumors?
- 5 How Do You Buy the Rumor and Sell the News?
- 6 Buy the Rumor and Sell the News: An Example with Penny Stocks
- 7 Buy the Rumor, Sell the News: FAQ
- 8 Who's Buying When Everyone's Selling a Stock?
- 9 Can I Apply 'Buy the Rumor and Sell the News' in Forex Trading?
- 10 Buy the Rumor, Sell the News: Conclusion
- 11 One Platform. One System. Every Tool
Buy the Rumor, Sell the News: Meaning
What does it mean to buy the rumor and sell the news?
It’s a basic strategy in stock trading that plays on the market’s behavior.
The market’s a discounting machine. That means that everything that affects a stock’s value is already priced in.
But what about something that MIGHT affect a stock’s value? That’s called a rumor, and it can make for some big plays.
The big percent gainers I scan for in my Pre-Market Prep sessions are often driven by speculation.
By the time the actual news hits, it usually doesn’t move the needle as much…
That’s why we buy the rumor and sell the news. It’s hard for the fact to live up to the possibility.
The market’s made up of people. Getting more excited by hope than reality is a very human thing.
I see this in my kids when I give them gifts. Sometimes they really want something. But sometimes by the time I get it for them, the excitement’s already worn off.
Why Buy the Rumor and Sell the News?
Let’s talk about how ‘buy the rumor, sell the news’ applies to stocks.
The ‘buy the rumor, sell the news’ strategy consists of two parts.
Remember Tesla’s 2020 Battery Day? As the event neared, its stock was at the tail-end of a large sell-off that had taken it down to $330 a share.
In the two weeks leading up to Battery Day, the stock clawed back to the $460s…
When the company’s earnings and future plans were announced, it took a steep dive back down.
It’s not that the news was bad! It just would have had to be mighty impressive to make that 40% gain seem worthwhile.
At the September 22 event, Musk talked about Tesla’s revolutionary new battery tech. He talked about truck preorders and future plans.
Traders weren’t impressed. Within two days, Tesla stock had fallen back to the $350 level.
Why Buy the Rumor?
Elon Musk first announced Battery Day during a January 30, 2020 earnings call. He said, “Battery Day people. Wait until Battery Day. It’s gonna blow your mind. It blows my mind, and I know it!”
Within three trading days, the stock spiked 56%.
Closer to the event, Musk tweeted, “Many exciting things will be unveiled on Battery Day 9/22.”
Over the next two trading days, the stock spiked 27%.
We could look at these as catalysts on their own. But they weren’t news. They were promising news in the future.
That’s when the rumors got started.
The rumors took Musk’s boasts as a starting point. And they went to some wild places!
People started to wonder what would blow their minds. They came up with a list of possibilities.
Top analysts were sure Tesla was announcing a subsidiary battery business. With it, Tesla would once again assert its leadership over its growing competition.
Some thought Teslas would begin selling at the same cost as conventional cars. That’s what Musk pledged in 2018.
Others speculated on a million-mile battery. They dug into Tesla’s patent history to find that one. And they speculated some more. “The aim is to create a stigma about cars that cannot last a million miles,” wrote Steve LeVine.
Why Sell the News?
Battery Day didn’t produce bad news.
At the presentation, Musk unveiled a new battery with five times the energy of today’s batteries. This would increase the car’s range by 16%. It would also help Tesla build cars at a lower cost.
Pretty impressive right? But it couldn’t compare to the expectations that had been built up.
Like I said, the market’s a discounting machine. As long as information circulates fairly, the market will figure out the stock’s value. A run-up on new information is the way it often happens.
Rumors are the first hint of new value. When the news comes out and fails to match this new value, it can prompt a sell-off.
Buy the Rumor, Sell the News Strategy
Pro traders understand this dynamic very well. Big players even help to create it when they buy the rumor and sell on the news.
Remember — strategies aren’t ‘systems.’ We don’t use a strategy like this because it’s foolproof. We use it because other traders use it.
That isn’t because of the stock’s innate value. The bounce comes from traders thinking the stock’s undervalued.
If enough traders believe something will happen, they create the conditions for it to happen. This is supply and demand 101.
The ‘buy the rumor and sell the news’ strategy has a logic to it. But it also has reinforcement from the market.
Experienced traders buy the rumor in anticipation of the news. Then they sell to newer traders who buy the press release.
This is a snapshot of how the market works. It’s why some traders come out on the winning side of trades more often than others.
Traders who use this strategy well follow rules. Here’s how they do it…
Don’t Be Afraid to Take the Predictable Move
Predictability is one of the main strengths of this strategy.
Stock rumors are the time when the market dreams. If the rumor’s juicy enough, these dreams can get big…
How much bigger could Battery Day have been than the rumors? Would the news have overshadowed the rumors if Tesla had announced a new business?
I don’t think so. New businesses have costs … If that was the news, the market would have started factoring in those costs.
How about if Musk had announced the immediate release of his $25,000 car?
Maybe, but it still sounds like a pipe dream…
It’s better to build your trades around more likely possibilities. The move you know is a better bet than the move you don’t.
Think Ahead, Always Look Forward
Maybe Elon Musk could have announced a teleportation device on Battery Day. It’s unlikely, but the guy can do anything! It’s not the worst thing to hold onto Tesla stock.
But what about Dogecoin? ‘Buy the rumor, sell the news’ applies to the crypto world too…
The excitement around Musk’s “Saturday Night Live” appearance was a textbook case.
"Buy the Rumor, Sell the News"— StocksToTrade (@StocksToTrade) June 21, 2021
Is it a coincidence that the all-time high of $DOGE was the day the #DogeFather appeared on Saturday Night Live?
Whether this rebounds or not, #dogecoin is still down 70%+ from highs. What do you think … can #doge recover? pic.twitter.com/fo5kiPMlnz
How could his appearance have sent Dogecoin past its record highs?
He said, “It’s an unstoppable financial vehicle that’s going to take over the world.” What more could he have possibly done?
If you’d thought ahead, you’d have known that the pre-show rally was all hype. The news didn’t have a chance to live up to it.
I often say I want to see a stock prove itself. But I’m not talking about stock rumors proving themselves. They don’t have to amount to anything to move the stock in a meaningful direction.
This is the mistake many new traders make. They’re still thinking like investors. They want to make sure the stock they’re buying into is real.
As a trader, you’re only concerned with your trading plan. You don’t care about a company’s long-term prospects.
Rumors of a partnership with Apple or Tesla don’t have to develop into an actual deal. They can still act as catalysts.
Ride the Waves of Anticipation
Buy the rumor, sell the news is even more important in the Reddit age.
On popular forums like WallStreetBets, everyone has a voice. During the GameStop (NYSE: GME) run this year, the stock was all that anyone could talk about.
I talked about GameStop’s potential all through 2020. What’s the difference between my stock posts and hall-of-fame Redditor Keith Gill’s?
Gill, aka DeepF***inValue, got others talking about GME. He also laid the groundwork for a classic ‘buy the rumor, sell the news’ play on his YouTube channel.
He wasn’t just talking about charts and potential trades like I was…
He talked about the greed of short sellers like Melvin Capital, the power of retail traders united, his $50 million gains…
And he quoted that viral video of the lawyer wearing a cat face filter at his SEC trial.
All of this got people talking. And this created anticipation. That’s the thing about rumors. They get more people talking than the actual news.
When Melvin Capital was on the other side of the GameStop trade, it prompted a lot of rumors. Traders anticipated its losses. Putting Melvin out of business was a Reddit rallying cry.
This was a factor in the stock’s spike.
What happened when Melvin exited its position a few days later? The discourse had already moved on.
The actual news about Melvin hardly moved the needle at all.
How Do You Find Stock Rumors?
Stock rumors are all around us! Companies try to solve real-world problems … The real world is one place we can find these rumors.
Check out this video by Small Cap Rockets trader Bryce Tuohey:
In this video, Bryce talks about the third stimulus bill before it was signed. This is the kind of rumor that affects every stock on the market.
See, you learn more about the market by learning more about the world.
I don’t love marijuana stocks, but smart traders knew the bump they’d get when Biden won the election.
Electric vehicle stocks also benefited from the post-election buzz.
These are big-picture rumors. Politics affect everyone’s lives. People talk about them A LOT.
What about rumors that affect individual stocks? Check the internet.
Reddit and Twitter are rumor factories. They’ve been cranking out GameStop and AMC rumors all year.
And some things might not seem like rumors. They’re not about earnings or business developments or stocks going down or up.
These rumors can be hard to distinguish from pumps. How do you separate ‘real’ rumors from ones designed to part you from your money?
How Do You Buy the Rumor and Sell the News?
Here’s the tricky part. When do you buy rumors? When do you sell the news?
There’s a lot of information out there…
Some incorrect, and some an outright lie. And some news will be a catalyst while other stories cause a stock’s price to dip.
How can you tell the difference?
It’s a skill to learn how to separate rumor plays from ordinary pumps. Like any skill, it helps to learn it alongside others.
This is the type of thing we sort through every day on the SteadyTrade Team.
Twice a day we get together and go through market rumors, news, and moves. We talk strategy and trading plans.
I’ll never tell you what to do. I’m no guru. I’m just a trader who works hard and sticks to his trading plan.
That’s all I’ll ever ask of you. If you think a rumor is tradeable, I might ask you why…
If you’ve thought about it, you’ll have an answer. Then we can come up with a trading plan that will help you stay safe.
Trading can be scary. It helps if you have support. Join us on the SteadyTrade Team today!
Buy the Rumor and Sell the News: An Example with Penny Stocks
This strategy can seem different with penny stocks. Most penny stock news comes out of nowhere.
And that’s where it goes when it’s through with its run.
How can you buy the rumor and sell the news on a Bitcoin pump when the stock didn’t even have a crypto division yesterday?
This is one of the issues using this strategy on penny stocks. Since most of this news is fluff, it’s hard for rumors to get out.
When can you use this strategy on penny stocks? Let’s look at Energous Corp. (NASDAQ: WATT).
WATT has stayed in penny stock territory for the past two years. But in 2016 it nearly hit $20 on rumors it was working with Apple on wireless iPhone charging.
It halved its value when the 2017 iPhone came out — without the technology.
Its next run was based on actual news. It received the first FCC approval for a wireless charging device at the end of 2017. It spiked all the way up to $30.
This is another case where the actual news was worse than the idea of it. Penny stocks often have this problem!
First off, the charging device the FCC approved didn’t carry enough power to charge a phone. Second, senior management quickly sold off thousands of shares. Strange move when you’ve got shares in the tech of the future…
Now WATT’s bumming around in the $2s. If you buy the next WATT rumor, be ready to sell it quick!
Buy the Rumor, Sell the News: FAQ
There are a few more questions I didn’t get to…
Who's Buying When Everyone's Selling a Stock?
If it’s truly ‘everyone’ selling, then the stock will plummet until traders like its value. If it’s traders selling on news, there will usually be some new traders around to buy.
Can I Apply 'Buy the Rumor and Sell the News' in Forex Trading?
The principle’s the same. Currencies go up or down in response to world events … or even what speculators think may happen.
Buy the Rumor, Sell the News: Conclusion
Buying the rumor and selling the news is a pro trading strategy.
That’s not because it’s the right move every time…
Sometimes news can blow away the rumor! Just look at the third stimulus package. The rumor didn’t predict it would be as big as it was.
But trying to predict the unpredictable isn’t a safe strategy. And pro traders trade safe. That’s how they win more than they lose.
How do you approach the ‘buy the rumor, sell the news’ strategy? Have you ever used it? Let me know in the comments!