Buy the rumour, sell the news strategy explained

‘Buy the rumour, sell the news’ is a well-worn expression, and in the context of trading, it means that if good news is expected sometime in the future, the price will often move higher in anticipation of that date, but not necessarily after.

Market pricing tends to move in anticipation of something happening – the rumour. By the time the event happens, most people who want to own the stock or currency already do. This means that when the event occurs, there is no one left to buy and keep pushing the price up. This leads people to sell, trying to cash in their profit.

In the same way, if positive news comes out and a stock or other asset drops on the news, traders will say, “the information was already baked in”. What they are referring to is the fact that the price rise happened before the news, so the price of the asset already reflects the impact of that good news.

People tend to buy in the days and weeks leading up to an event that is supposed to be favourable for the security in question. For a stock, the event could be an earnings report or a stock split​. For a currency, it could be an expected rise in interest rates.

Traders use a buy the rumour and sell the news tactic when there is a highly anticipated event in the future. Such events may include:

For traders interested in trading on interest rate announcements, which can have a significant impact on stocks, forex, and bond markets, here’s how to find out what interest rates are expected to do in the future. It is the expectation that often drives prices. For example, if the Bank of England is expected to raise interest rates, that may push the British pound (GBP) higher against other currencies. This rise may occur before the rate is raised.

The Chicago Mercantile Exchange (CME) publishes the probabilities of what the US Federal Reserve and Bank of England are likely to do at their upcoming meetings. For example, if no change is expected, then it may say there is a 100% chance that interest rates will stay at the current rate. If there is a 50% chance rates will be raised, the expected rate and current rate will show a 50% probability.

If a company is expected to have a very positive earnings report, some traders will buy prior to the announcement because they know others will also be buying into the hype. If earnings come out as expected or worse, they may sell. If earnings are much better than analyst expectations, a trader may hold on as the positive news may surprise people and bring new buyers in.

A trader may also use one company’s earnings to help predict what may happen with the earnings reports of other companies in the same industry.

For example, Snapchat reported earnings 44% better than expected in July 2021. Twitter also reported better than expected earnings. Even though earnings from Alphabet and Facebook weren’t due out for several days, these stocks also jumped following the Snapchat news, since traders assumed that companies with similar business models such as Facebook and Alphabet would also be able to beat earnings estimates. Subsequently, the price of Facebook and Alphabet rallied into earnings and then declined when earnings came out. Traders bought the rumour, baking into the price the fact that earnings were likely to be good. When good earnings came out, traders sold the stock and collected their profits.

While analyst opinions and consensus estimates are useful, traders could also look to a “whisper number.” This is what traders believe is likely to happen as new information comes out. For example, after Snapchat and Twitter posted better than expected earnings, traders assumed (“whispered”) that Facebook and Alphabet would too. This information got baked into the stock price, resulting in a rise ahead of earnings.