Buy The Rumor, Sell The News Part II

I've been hearing a lot of the phrase, "Buy the rumor, sell the news." This Wall Street Proverb sounds intelligent and is freely thrown around forum posts everywhere but what is the real meaning of it all.

Often a rumor will circulate about some future news release.  Rumors can quickly start from anywhere such as news articles, forums, and just about any other communication media available. Let's take as an example the New Home Sales report released last week.  The consensus was for New Home Sales to come in at 1105K.

Here are a couple of headlines that could have affected your thoughts on the New Home Sales report:

"Horizon Gloomier for US Economy"

"Analysts Expect Home Sales to Drop by 10% This Year"

"New Home Sales Report Could Put Nail in Dollar Coffin" 

Before the report is released, you're being bombarded with speculative information that only deteriorates your view of the consensus which in this case was 1105K.  Traders acting on rumor start to fill their minds with random numbers typically less than the consensus.  

What Trader's May Be Thinking

"I see tons of for sale signs around my house but nothing under contract.  There's no way the number will come in at 1105K"

"1000K" 

"A real estate broker I talked to said houses are taking 5 months to sell now where last year it only took 4 weeks.  New Home Sales won't be 1105K.  I'm thinking it will be 900K"

"850K"

Before the news is actually released, traders are bidding against the USD based on these wild assumptions.  These rumors alone can beat down the USD.  But once the announcement is released, the facts rarely end up being as bad as the rumors.  Since all of the greatest possibilities have already been priced into the currency pair, the news actually causes the currency pair to "re-price itself" to the facts.  Last week, the actual New Home Sales was 1072K and the USD gained against most of the majors.  It gained because the worst possible news had already been priced in.

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