To The Moon

I heard a rumour

They say you've got a broken heart

I heard a rumour

Yes, I did boy, ooh-ooh

Heard of this song by Bananarama? It’s ok if you’ve not. Let’s dive right into this strategy and decide on how can you use it to trade on earnings and interest rate announcements, or anywhere there is a risk event before zooming into the two biggest rumours coming up this week, shall we?

To pop or not to pop? 🍾

‘Buy the rumour, sell the news’ is a well-worn expression, and in the context of trading, it means that if good news is expected sometime in the future, the price will often move higher in anticipation of that date, but not necessarily after.

Market pricing tends to move in anticipation of something happening – the rumour. By the time the event happens, most people who want to own the stock or currency already do. This means that when the event occurs, there is no one left to buy and keep pushing the price up. This leads people to sell, trying to cash in their profit.

In the same way, if positive news comes out and a stock or other asset drops on the news, traders will say, “the information was already baked in”. What they are referring to is the fact that the price rise happened before the news, so the price of the asset already reflects the impact of that good news.

People tend to buy in the days and weeks leading up to an event that is supposed to be favourable for the security in question. For a stock, the event could be an earnings report or a stock split and certainly the rates cut at FOMC this week. We have witnessed the strongest rebound in the last five trading sessions leading to FOMC on Wednesday, Sep 18.

What Rumours Are We Looking At?

Rumour 01: Fed cuts interest rates and stock market is going to the moon.

A breakout or third time unlucky?

For the whole of last week, traders are buying into indices because the expectation is that the future announcement or data point will be positive. The strategy says to sell when the actual news comes out, assuming it is close to what was expected.

If the news is much better than expected, the traders may decide not to sell, since the better-than-expected news may lure in additional buyers, helping to push the price up even more.

Rumour 02: Second half of September is going to be ugly.

Historical dive after FOMC or mere coincidence?

September is historically a bad month for stocks. The ninth month of the year is the only month when the historic average performance of each of the major stock indexes is a negative number.

But if you have a long-term investing mindset, the September sell-off could present a great opportunity. Not only do the winter months bring historically strong returns, but any sell-off in stocks gives investors a chance to buy a stake in great companies at a fairer price.

⚠️ Buy only on dips this week and avoid FOMO chase. Using SPX as a guide, ideal to dip buy between 5600 to 5608 towards 5650, 5670, 5700 (price targets) with a stop loss at 5572. Puts can work below 5568 for day trading.

Whatever your decisions you intend to do, have in place a stop loss order to control the risk so that you won’t get a broken heart as Bananarama puts it in their song at the end of the week.

Economic data for the week

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