by kublikhan » Mon 03 Nov 2008, 18:08:00
$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('Armageddon', 'T')hat's like somebody saying your wife was caught getting gang banged by 30 guys but finding out it was really only 10.
Can you imagine the news media saying:
"The stock market went up today and we honestly have no idea why it did."There would be so much truth to that statement but unfortunately a story like that doesn't sell too many newspapers.
Society demands an explanation from an authority figure.
Even if such "authority figure" doesn't know the difference between his ass and a hole in the ground.
It's really not that confusing why stock markets go up when expected bad news is released.
$this->bbcode_second_pass_quote('', 'Q'): What is the rationale (if any) behind the phrase, "Buy the rumor, sell the news"? -- H.Y., Los Angeles
A: "Buy the rumor, sell the news." Ah, a tried-and-true phrase that makes its utterer sound oh-so-intelligent. Ultimately, we think that buy-and-hold investors aren't going to be too concerned with what the rationale behind the phrase is (it plays a bigger role in a short-term trader's stock moves), but let's take a quick crack at explaining it.
Oftentimes a rumor will circulate around a stock or a company. The rumor might be that the company is going to be acquired by a competitor, or that an exciting new cure for the common hangover is about to be released. When a company is rumored to be acquired, those who are acting on the rumor can mentally fill in more or less any acquisition price that they like -- until an announcement turns the rumor to fact. Should an actual acquisition ever be announced, the facts rarely end up being as attractive as the upper limits of the rumor. Because all the best possibilities have already been "priced into" the stock before the real news breaks, the actual announcement tends to reveal the limits to the good news, rather than just the positives that are at the center of any rumor.
Taking a real world example from the recent past, consider what happened last year to Pixar Animation, the company that has produced the hit films Toy Story and A Bug's Life. Prior to the 1998 Thanksgiving release of A Bug's Life, rumor was spreading around about the potential for the film. Upon this speculation, Pixar's stock rose from a low of $20 a share at the beginning of 1998 to $53 right before the film opened. When A Bug's Life did open, it broke all the box-office records for an animated film opening on Thanksgiving weekend. And yet the stock quickly lost about 40 percent of its value over the next month and is still substantially below its November 1998 price.
This was a classic "buy on the rumor, sell on the news" scenario. Although A Bug's Life was a very successful film, ultimately grossing more than $350 million worldwide, it was not nearly as big as the rumors would have had it being. To sustain the price that the rumors and speculation had created, A Bug's Life would have to have been as big as Disney's The Lion King, the most successful animated release of all time.
While A Bug's Life was as big a success as an investor could rationally have hoped for, it wasn't as big as the rumors -- because few things ever live up to those types of hopes. When a rumor becomes "news" and there are real numbers and real facts attached to it, a lot of short-term investors will find that a good time to sell, and over the short term that will affect the price of a stock.
The converse of the above is also true. When the rumor is the expected news is going to be really bad, people sell and short a stock to a level that is some really low value. Then when the actual news comes out, it is usually not as bad as people were expecting. For example, the rumor may have been that GDP shrunk 2% last quarter, and the DOW was priced accordingly. When the actual news is released and GDP "only" shrunk .3%, the DOW rallies because the news while bad, was not as bad as the rumor.
