How many times have you heard the saying, buy the rumor and sell the news? What this saying really means is that the good news is already factored into the price of the stock at the time of the announcement. Just think about how often we have seen companies report terrific earnings, only to see the stock price decline sharply after the earnings announcement, it happens all the time.
Here is a slightly different example, do you remember the Federal Reserve announcing its $85 billion a month QE-3 program in mid-September 2012? The major stock indexes were soaring into the day of that announcement. As you all know, the stock market staged a two month correction after the announcement. Obviously, the secret here is not really a secret at all, the institutional money just figured that all of the good news was baked into the cake already. Remember, before the QE-3 announcement the stock market indexes were surging higher on the anticipation that the central bank would continue its easy money policies. The stock market institutions love low interest rates and easy money, so when the announcement was made that the easy money policies would continue from the central bank, the institutional investors locked in the profits. This "buy the rumor sell the news" cycle has been happening for hundreds of years, and will happen until the end of time if you ask me. It happens in all markets, not just the stock market. How often have you seen the latest fad or craze with a pair of shoes, designer pants, or latest electronic device? Once everyone in the public owns those products they become out of style and the price drops dramatically. Well, the stock market works the same way. Below are three ways that you tell when you can sell the news.