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Buy the Rumor, Sell the News

16 Jul

Buy the Rumor, Sell the News

Gold Market Discussion

An old market adage advises to “buy the rumor, sell the news.”

In application, it suggests that you can buy stock XYZ when the market assumes that something important – a takeover, an acquisition, a major breakthrough – is imminent, but then to sell quickly when the actual news hits.

There is a justifiable cynicism to the advice.  After all, it sometimes happens that market rumors are fabricated out of little or nothing, simply to run a stock price up.  The rumormongers are poised to sell at the top when the news proves to be entirely fictitious or less than impressive.

That’s the description of a “pump and dump” scheme.

When the news is real, insiders have still positioned themselves well in advance.  Lest they be accused of illegally trading on material non-public information, some patiently wait to profit when the rumored announcement is finally made.  

“Buy the rumor, sell the news” is probably pretty good advice in the face of the widely expected Federal Reserve interest rate cut.  In this case, we are not suggesting you go out and buy stocks before the upcoming Fed announcement.  Certainly not.  But realistically, if you are holding stocks you are already participating in the bubble; you have already effectively “bought the rumor.”

If the market universally expects that the Fed will cut interest rates, what happens when it either does so – or fails to do so – at the July meeting?

First, if it fails to cut rates, the disappointment will be widespread.  Expect a hard fall in stock prices.  Hard.   The S&P 500 fell 25 percent in three months last fall over interest rate disappointments.

Meanwhile, the market has been buying the rumor, the expectation of a Fed rate cut, since the first of June, climbing non-stop ever since.  The market believes a rate cut is a given.  

That’s the “pump” part of the “pump and dump” scheme.

But if the Fed does cut rates, some observers suggest the Wall Street will “sell the news.”  That’s the “dump” part of the “pump and dump” scheme.  

Wall Street “selling the news” will trigger the next big decline.  That’s the view of Jesse from Cafe Americain and others close observers.

It is a view we share.  Although there is no shortage of other candidates to trigger the stock market sell-off, typical rumor/news market behavior is as good a trigger candidate as any.  This is especially true in the face of what fund manager John Hussman calls some of the most extreme market valuations in history.  Says Hussman, “Presently, we observe market conditions that have been associated almost exclusively, and in most cases precisely, with the most extreme bull market peaks across history.”

Be ready.  The highly anticipated Fed meeting is only two weeks away!

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