Ford - Buy The Rumor, Sell The News?

Is Ford's stock price action a case of "Buy the rumor, sell the news"? At first glance based on the early morning price action, I'd have to say yes.

I mention "at first glance", because there can be many things going on at once with any particular stock as well as the overall markets in general, that can affect a stock's price action at any given moment.

Also, because the idea of coming up with an explanation for a price movement that has already happened is easy to do and justify, it is not always the underlying cause of the price action itself.

The "Buy the rumor, sell the news" concept is based on "psychology", which further complicates it's understanding a bit.

Let's take a look at the price action for Ford stock (ticker symbol: F) as of the time of this writing, which is shortly after the market opened on April 27, 2010.

The first image below is a snapsot from 10:06 a.m. which shows the price action as well as some of the top headlines from Ford this morning:

Ford - Buy The Rumor, Sell The News?

You will notice a few things at first glance:

  • The stock closed the previous trading day at $14.46, near it's 52 week high.
  • F opened today at $14.44, and immediately moved lower and was at $13.80 at the time this snapshot was taken at 10:06 a.m.
  • The headlines state that Ford posted a $2.1 billion dollar quarterly profit, AND they raised their outlook for the year.

Typically, a company posting a huge profit, AND raising their outlook for the year would be enough to cause a stock to rally, typcially. After all, if the future looks better than expected, shouldn't a stock do better?

This is where "Buy the rumor, sell the news" comes into play. A scenario where this plays out can go like this: investors anticipate profits and an improving outlook, so for several months in advance they buy up larger and larger positions in a company stock. Notice I mentioned "in advance".

What they are doing is "buying the rumor". Then, when the actual earnings results come out (or any related press release to the intial rumor), those same investors who were buying several months in advance congratulate themselves for being right by closing out their positions (selling the news) and celebrating.

For a better idea of how this could have happened in the case we just have to look at a historical chart of Ford (F). Take a look below:

Ford- Buy the rumor, sell the news chart

You can see that Ford (F) stock has had a great run since the low near $1.00 a share back in November, 2008. You'll also notice that when the major market indices made their lows in March, 2009, Ford (F) made a "higher low". A good sign of potential strength.

Just think about all of the investors, hedge funds and other fund managers who have already built up positions along the ride up from $1.00. At it's current price near $14.00 per share, it's easy to see how they may be a perfect example of "buy the rumor, sell the news".

Note: I have no position in Ford (F) stock, nor should this be considered a forecast of where the stock will go from here. In fact, this stock could potentially reverse from here and close the day higher. Who knows for sure? This article is to provide an example of a potential "buy the rumor, sell the news", and how it may play out over time.

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