Buy the Rumor, Sell the Fact: How Anticipation Shapes Price

[Fairman]

Buy the Rumor, Sell the Fact: How Anticipation Shapes Price

Markets are forward-looking. By the time an event happens, much of its effect may already be in the price. This is the idea behind the old trading phrase "buy the rumor, sell the fact."

Take a widely expected rate hike. In the weeks before the meeting, traders buy the currency in anticipation. When the hike arrives as expected, there are no new buyers left. Some traders take profit, and the currency may dip or stall, despite the apparently positive news.

The pattern is not universal. If the event surprises, the move can be large and sustained. And in strong trends, anticipation can build for long periods.

How do you tell whether something is priced in? Look at the price action leading up to the event. A steady move in the direction of the expected outcome suggests that traders have positioned. Compare interest rate futures or market-implied probabilities, available from financial data providers, with the expected outcome.

If markets assign a 95 percent probability to a hike, the hike is priced in, and only a surprise matters. If the probability is 50 percent, the outcome will move prices significantly either way.

This also explains why good news can lead to falling prices, a source of confusion for beginners.

Practical step: for your next scheduled event, note the market-implied probability beforehand and the price reaction afterward.

[Fairman]

Classic sign for me is a currency that rallies for two weeks into a meeting, then drops on the news. If you're long going into it, it's often better to take some off before the event than to hope for one last push.

[Fairman]

Worth adding that the guidance can matter more than the decision. A fully priced hike plus a dovish hint about the next meeting is a pretty common recipe for the sell-the-fact move.

[LondonNewsTrader]

Alongside implied probabilities, the CFTC's Commitments of Traders report gives a rough view of positioning before an event. The report comes out late on Friday, New York time, using Tuesday's data, so it's a few days stale, but when speculative positioning in a currency is already near an extreme going into a meeting, a fully expected decision has fewer people left to push it further. It's crude, slow and only covers futures, yet it adds a second angle to the "priced in" question that price action alone can't answer.