There is a phrase ” The Unknown is Perceived to be Grand”. Today’s topic is somehow indirectly related to this phrase. Those who are we well-acquainted with Stock Market may think the phrase “buy the rumor sell the news” sounds like a precarious plan but in reality, it can also be a shrewd one. It is such a phenomenon that happens in most of the financial market. Nowadays, it is considered a popular trading strategy.
Buy The Rumor
The first and foremost thing to understand about the stock market is it is forward-looking. The term “forward-looking” indicates one of the most crucial features of the stock market. It’s a common phenomenon that the price of a stock doesn’t represent the value of the company’s past performance. Hence, news, rumors play a vital role in determining a stock’s current price.
Sell The News
This part carries exactly the opposite behavior to the previous part. As the stock price moves in anticipation of rumors after the actual news is released it rebound after the profit-taking occurs. Therefore, for obvious reason, the tactics are risky enough to implement. Basically, in simple terms, based on the rumors price reaches a new high before the event and falling lower immediately after the event because of profit booking (even when the news matches the forecast).
Buy the Rumor Sell the News Examples
We have to admit one thing that Companies, headlines, earnings number don’t move the stock market that much, Traders move the market with buying and selling stocks. In order to clear the concept, I present some of the recent examples from the Market.
A few days ago, the shares of Yes Bank fall drastically due to the resignation of Independent Directors R Chandrashekhar and Vasant Gujarathi, and Non-Executive Chairman Ashok Chawl. Now, the twist is there is a rumor that YES bank board is about to finalize CEO candidate ai January 9 meetings. After the meeting, the bank will send the name of the candidate to RBI (Reserve Bank of India). Hence, it’s being expected that YES Bank stock will rise high before 4-5 days of the meetings and drop on a particular day. You may monitor the phenomenon by yourself before 9th Jan.
Jet Airways is another example of the phenomenon. There was a rumor that Tata group plan to acquire a controlling stake in Jet Airways. After releasing the rumor, Jet Airways Stock price reached its peak (From 200 range to 400 range) but a few days later the deal postponed and the share price level fall.
Lastly, we present an example of Nifty. After exit polls result for five states showed Prime Minister Narendra Modi’s popularity is in doubt going into 2019 election, Indian equity benchmarks opened lower on Monday. I’ve stated above that the rumors can be true or false but some of it affects stock market very deeply. As a result of the exit poll rumor, the Nifty 50 Index fell as much as 1.94 percent to 10,486 early on Monday. Here is the graph:
So, these are some of the real-time examples of buy the rumor sell the news phenomenon, taken from the market situation.