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Buy the Rumor, Sell the News Logic on Brexit, Fed Hikes, US Policy

Buy the Rumor, Sell the News Logic on Brexit, Fed Hikes, US Policy

2017-03-30 02:26:00
John Kicklighter, Chief Strategist
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Talking Points:

  • 'Buy the rumor, sell the news' is a frequently used platitude in trading that overly simplifies reality
  • The 'buy the rumor' component speaks to speculation guiding market levels but 'sell the news' is rarely wise
  • We consider this particular trading aphorism with the recent Brexit milestone, FOMC hike and US policy promises

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

'But the rumor, sell the news.' Most traders have heard this said...and most traders have said it themselves. This popular market maxim has a core of wisdom to it. However, it also has its detrimental balance of over-simplification. At its core, this aphorism speaks to the speculative influences behind the market. Well before a piece of data hits the wires or a policy is implemented, anticipation of this event risk motivates the trading rank to position before it is confirmed. By the time this evolution is realized by the 'mainstream', the deft speculator has presumably sapped the bulk of value from the trade and uses this last infusion of late-comer capital as liquidity for their exit. If only reality lived up to such self-aggrandizing.

Such an idealistic view of the flexible and cunning speculator overpowers the practicalities of the rumor-news considerations. Evoking this mantra can help call into perspective the influence of speculation on dictating market direction and speed. Markets operate on a sense of probability - which is to say speculation. Anticipation can build up an expected value of a market that is never realized by the particular outcome depended upon. The result is a dramatic market correction to rebalance to the new confirmation of reality. There is also the scenario where the forecast proves correct, and some or all of the value has already been drained from the market. It is the event - technical, fundamental, systemic - that ultimately determines whether the build up was valid. That uncertainty paired with the leverage of exposure creates significantly greater risk. When we follow the 'buy the rumor, sell the news' maxim without considering the full nature of the strategy and uncertainty behind our exposure; we trade a full-fledged strategy and analysis for a flippant saying.

There are a number of examples of this popular view on the market that have or are currently taking place now. The most prominent this past session was the speculation surrounding the Brexit. The UK Prime Minister sent the official letter of intent to withdrawal her country from the EU. This was a fully expected step in the saga of this European divorce and lays the long road to full separation clearly before us. And yet, there was still anticipation that a dramatic reaction was due from the Pound. The Sterling didn't collapse upon the news nor did it rally as the clever speculators following the mantra might expect. Pairs like GBP/USD merely leveled out. Similar progressions of realized but over-simplified views along these lines were afforded to the FOMC rate hike on March 15 and the amorphous speculation surrounding US policy. We discuss the wisdom and limitations of 'buy the rumor, sell the news' in today's Strategy Video.

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