This Trade Taught Me A Big Lesson

You’ve heard this before:

“Buy the rumour sell the fact”

What does it mean?

Simply put, it means positioning for rumoured news and then closing your trade into the news.

But why?

Let me tell you a story about when I first encountered something similar.

Back in 2005 ish I was long on an oil exploration company called Chaco Resources.

This thing was going to be the next BP – they were due to publish the results of an exploratory oil well, and everyone was expecting them to announce a huge discovery.

The price had been slowly marching higher, people on stock forums were going nuts for it.

It just kept grinding higher and everyone was watching the news in anticipation.

Aston Martin brochures were browsed, holiday homes, heck this thing could buy an island!

      
One morning I came to my screen pre-open and saw the news:

Chaco had discovered a huge oil well, findings were positive, this thing was a company changer.

Everyone talked about what the oil was worth per barrel in the ground, how they could partner with a big oil company or sell the rights to a big boy. The company was rolling in cash now.

Who knows what the open print will be?!

Up 20%, 50%, 200%?? this thing is going to fly!!!!

Ding ding, 8 am and it gapped up about 10%.

Alright, a slow burner, wait until institutions hear about this, they will be scrambling to get long.

A few minutes later, up 8%, 4%, 2%, now flat on the day.

WTF?

This should be double.

Traders on the forums were going nuts, “Why is the stock not up 50%?!”

No one could understand it.

At the end of the day Chaco was down big and we were all licking our wounds wondering what happened.

This was supposed to make us all rich. Instead, we’ve barely broken even.

So what actually happened?

Well, the rumour mill was alive.

Any retail trader interested in stocks knew about this. And anyone who wanted to get in was definitely in.

This wasn’t Apple or Amazon, it was a small-cap oil exploration company. No big institutions would ever be interested.

All the moves were fuelled by retail and small funds.

As the rumour picked up pace, the buying picked up, and the price moved higher in anticipation of the news.

But here’s the problem with that…

Who is left to buy when the good news hits?

That’s right.

No one.

Everyone who wants to get in is already in, there’s no more money to buy with, and everyone is fully loaded up with shares.

So what happens?

Limited buyers = price does not move higher.

And then all that inventory held by retail who are sensitive to short-term moves is now coming into the market.

This is the news everyone was waiting for, and nothing has happened.

In the words of a popular TV show “Get me out of here”.

That created a huge overhang of supply which put a lot of pressure on the price.

And so down it went.

It’s a pure supply and demand auction process.

Fundamentals matter, but what matters more for us is how the market responds. That gives us a true insight into who is truly in control.

Lesson learnt.

If I’m ever in a trade that revolves around anticipated news (pretty rare). If everyone is waiting for that news, I’m out as soon as it hits.

These old sayings don’t come from nowhere!