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"Old trader" sayings are plentiful. But some are really useful.
And there's one saying that seems to work in so many situations:
Buy the rumor and sell the news.
Perhaps no one said it better than the Lord Rothschild back in 1810 when he said, "Buy at the sound of the cannons, sell at the sound of the trumpets."
And of course more recently, the Lord Buffett of Omaha said, "Be fearful when others are greedy and greedy when others are fearful."
Well, both Lord Rothschild and Warren Buffett would enjoy capitalizing on the setup I see happening right now. It's already paid off big, and it's likely to do so again before the market changes.
Here's what I mean…
This Kind of "News" Makes for Fast Triple-Digit Gains
Banks do well in rising interest rate environments. The reason is pretty simple: When interest rates are high, they can charge a larger spread – the difference between the rate at which they borrow versus the rate at which they lend.
A bigger spread means more profits.
So one would expect bank stock prices to go up on the "rumor," which is to say, the probability, of an interest rate increase, and then sell off when "news" of an increase actually hits, and move back to a position of strength once the selling ends and the buying – of future higher profits – gets going again.
But bank stocks sold off leading up to last week's most recent Fed rate increase. And while this is unusual, it's actually a neat twist on "selling the news."
Of course my chart showed there was no fundamental, real danger in the stock, hence no "real" reason for the sell-off other than the classic behavior pattern of selling the news.
That's because the normally obscure and vague communications emanating from the Fed were unusually transparent leading up to the Federal Open Market Committee (FOMC) meeting and subsequent announcement.
You see, the markets were close to 100% certain of a rate increase weeks before the announcement, and the banking sector was practically destined to sell off once the Fed made their telegraphed intention a market reality.
In my Stealth Profits Trader service, the sell-off alerted me to an opportunity in banks stocks, so we quickly entered a financial services trade at a great price (note: my readers can get my instructions here), and by yesterday, we were sitting on a fast 100% gain, with the possibility of still more to come on our remaining position.
It's a classic example of buying strong stocks in fundamentally strong sectors during pullbacks. It's simply one of the best ways to make money in this market.
Anyone can learn how to spot these kinds of opportunities to make quick, big gains. I've based my new free service, The 10-Minute Millionaire, in part around this fundamental market truth.
You can click here to start getting those alerts twice each week.
In the meantime, like I said, it's a smart move to think about what's really causing a sell-off – if it's simply traders selling the news in an otherwise strong sector, it's probably a juicy buying opportunity. On the other hand, if there's some fundamental weakness in play, proceed with caution.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.