[Note: This material is for educational and entertainment purposes only. Please consult an investment  professional before making any investment decisions]

“BUY THE RUMOR, sell the news.”

If there is one mantra that has held up since trading in financial markets began, this is it. We are all aware–especially the more romantic among us–that once it arrives, reality is not as potent as the anticipation of it: it’s an anticlimax. But how does that make for a trading opportunity?

The answer is simple: potential supply and demand.

Almost thirty years ago, a client of mine called in to place to buy two thousand dollars worth of stock options in advance of an upcoming “XYZ” company earnings announcement; he was the manager of  a distribution center that sold mostly products of XYZ.  He heard a rumor that the they would report “record earnings” and want to double his money on the announcement (this can happen with the use of options).  I placed the order on the basis that it was a rumor and not that he was trading with insider information; he was not a “control person” of XYZ and did not have privileged information.

When XYZ made the announcement, the stock fell and the customer’s options went to zero; he lost the two thousand dollars and was irate. “You guys are all crooks and I’ll never invest in the stock market again.”

When an event is anticipated as being monumental to the performance of a company or an economy, investors (traders) buy before the event on the narrative surrounding the event. This is partly why the market recovered so quickly during the summer months: everyone shared the narrative that “The markets will explode when they announce a vaccine.”

But here’s the rub: when the announcement is made, everyone looks at everyone else and says:

“Well, why aren’t you buying?”

Everyone else says:

“I already bought.”

Then, when the stock doesn’t go higher, and the first of the traders begin to sell; no one wants to be the last one standing when the music stops.

The “Vaccine Miracle” is a perfect example of Buy-the-Rumor-Sell-the-News. The above chart shows the reaction of the markets Monday and Tuesday (Nov. 9&10) after the announcement of the vaccine–which was even more impressive than had been expected.

Now that the vaccine is “merely” reality, investors are forced to look at a decimated economy and a deeply divided country. Their attention is now forced to focus on the future cashflows of that harsh environment. If you subscribe–as I do–to the BRSN mantra, the most likely outcome, now that most of the buyers have already bought, is a declining market. To reinforce that idea (and a partial explanation for it), the big technology stocks will lose their status as the chief beneficiaries of the pandemic. The “tech” stocks play an important role as widely held bellwether investments and many investors are shifting out of them and back into shares from retail, food and beverage, tranportation, etc beaten down from months of lower revenues.

WRH