Buy The Rumour – Sell The Fact
You may have heard the expression buy the rumor, sell the fact, and if you’re wondering what that means, one way of understanding that expression is to think of anticipation.
Whenever you’re anticipating an event, you might get ready for it in advance.
So for example, a silly example, but say you were planning on going swimming in the afternoon. Well then you may, in anticipation, pack your bag, your towel, your swimming trunks, perhaps some change for the locker. You’re anticipating the event.
Or maybe another example, perhaps you’ve been invited to a black tie event, but you realize you don’t have a black tie, so you have to go out and buy a suit in the week, in anticipation of the event in the weekend. That idea of anticipation is what’s behind the expression buying the rumor, selling the fact. In other words, when you’re anticipating an event in the markets, the markets tend to prepare for the event ahead of time, by buying into the rumor.
So let me give an example of this sense of anticipation. Now this is for a sell the rumor, buy the fact trade. And it’s a trade I took around March. Now at the time, the reserve bank of Australia were expected to cut rates and launch their quantitative easing program for the first time. So on the 17th March, what I was doing was selling the rumor, because the US dollar was strong, and the expectations, the anticipation was that Reserve Bank of Australia was going to cut interest rates and launch their quantitative easing expectations.
So I sold the position down. Now come 19th March, that’s exactly what the Reserve Bank of Australia did. But you can see at this point, the selling stopped. Why? Because traders had sold the rumor, but bought the fact. Now the reason they stopped selling was because everything that happened, it was bearish, but it was anticipated.
So when the RBA rate cut, and the QE was launched, there was nothing further to do. It was sold the rumor, and then buying the fact. You can see price actually rallied out of that event.
So you understand it’s all about anticipation. For these traders who were sure, like myself, to carry on going sure. What they needed to see was a deeper rate cut, even higher QE program than expected. That’s what would keep the Australian dollar moving down. As it was, it was as expected.
I hope that helps you to understand that expression, buying the rumor, selling the fact. Think about it as anticipation, and that’ll go a long way to getting on the right lines to understanding that particular market phrase, and traders’ behavior.