Buy The Rumor, Sell The News

I couldn’t sell either C or FAZ today…given the recent volatility and the upcoming news on “mark-to-market”, I figured it’s best not to choose a side yet.  If I choose to hold both for a week or two, the chances are

1. I’ll make big money on FAZ option and C becomes near worthless
2. FAZ option expires worthless and make money on C
3. C stays flat and FAZ expires worthless

I prefer scenario 1 and obviously not 3… At this point my downside exposure is pretty low on the option that I’m willing to wait.  I’m too damn busy with work this week so it may be a good thing that I don’t get distracted.

In the meantime I shorted HOTT today since I saw the stock close significantly lower yesterday from the day’s high AND it seemed to have bounced off from a last year’s support.  That’s usually a sign for a reversal.

It ended up rallying in the last part of the day today and is now holding the level above the 2007 support level.  It still hasn’t hit my stop-loss of $12ish but it may reach if this breakout is real.

I’ll bank on “buy the rumor, sell the news” for tomorrow. If the stock reverses, it could be a great short play.   Otherwise, if this break through the support level from 2007 is real, this could go up even further. Keep on watching cause this stock has been on fire since it posted very positive results/guidance on earnings in March.

So what is the saying “buy the rumor, sell the news”?

You often hear people talking about how you want to buy on the rumor and sell on the news. Well it’s a phenomenon in which stock prices go up in price prior to an anticipated big news pertaining to a stock or the overall market but immediately reverses its trend after the news is out.

Why does this happen?

1) Investors don’t know how to price the anticipated news

• You think the stock will go up in price because the company is going to post a positive earning.  Well can you figure out how much and how to reflect it correctly in the stock price? Hell no.

2) Often times the news disappoints

• Many investors give too much credit to the anticipated news and add too much excitement.  Thus price goes up before the news a bit too much and corrects itself afterwards.

3) Profit taking

• As soon as the rumor becomes official, people often times take profit.

Now this doesn’t always happen.  Sometimes the opposite can be true.  For example, the recent news on Geithner’s plan to remove toxic bank assets impressed many people.  So impressed that the Dow Jones index gained ~7%.  That was because many people hadn’t priced in the anticipated news by Geithner. (Not to mention how beaten up the market was by then)

So for me, I’m not sure what the new “mark-to-market” rule may be tomorrow, but I’m betting that it will be not so spectacular.  I hope I’m right so that I can bank on my HOTT short.  Otherwise this bull could really be building quite a force. df

Tim Sykes Challenge DAY 2 – APAC

Tim quoted:

Sold 3000 APAC at $3.31ish…not a great exit, had the chance to sell at $3.39 in the first 30 seconds of the market, but i wanted to give it time to try to breakout…when it couldn’t and with the bigtime negative market preventing any bigtime breakout right now, i played it safe and took my 4 cent loss…i will always play it safe when all the variables aren’t to my liking…next!

Guess it didn’t work out that well lol.  I was watching APAC this morning too but didn’t really feel right about going in at that point.

No trades today from his alert.  I really just need 1 or 2 good plays to make it worthwhile.  Common Timmay, gimme something good!