In November 2016, the US citizens went to elect their next president. Before the vote, polls had predicted that Hillary Clinton would win the majority vote and the electoral college. As such, the US stocks always moved up when polls of her victory came out. When the elections came, the results shocked many people and US futures dropped sharply. However, when the markets opened on November 9, stocks started to rally. This rally has continued to this day.
In June 2016, when the UK went to vote, many people expected the remain side to win by a large margin. However, when the results came out, the leave had won by a healthy margin. This led to a sharp decline of the sterling and UK stocks but days later, a short-term rally emerged. While the sterling has remained lower than before the vote, it has recovered most of the losses it suffered.
Yesterday, when the members of the UK parliament voted against a no-deal Brexit, the sterling rose. This happened as traders cheered that a worst-case scenario was now off the table. Minutes later, the sterling started to pare those gains and is still declining. This happened as traders started to price-in an extension of uncertainty in the country.
If you are a closer watcher of the financial markets, you must have observed this situation. This is where the markets tend to move opposite of the news. It also happened last year when the US released better than expected jobs numbers, leading to a sharp decline in stocks.
This situation is usually known as buy the news, sell the rumors. In other words, traders tend to be very optimistic ahead of key releases. As a result, they buy in advance. If their scenario works out fine, they exit, leading to the declining of the assets. This usually catches novice traders by surprise because they expect good news to lead to higher results. It is not uncommon for traders to buy the dollar when inflation rises and jobs numbers beat expectations.
The buy the news, sell rumors scenario is seen almost every day in the financial markets. It happens when a data is released in the economic calendar, when a company releases its earnings, when a major political event happens, and when there is a major environmental event. For example, in last year’s hurricane season, US stocks rose instead of falling. To novice traders, the hurricanes was a bad thing that would lead to lower stocks. Experienced traders for their part had already priced-in the hurricanes and didn’t expect them to have major implications on earnings.
Therefore, as a trader who follows the news, it is very important for you to understand this concept. It may help you make smarter investments will others don’t. It may also help you anticipate the price action that happens when news or data is released.