Buy On Rumour, Sell On Fact

On Monday, April 1, 2013 the PSE index was slightly down by 7.88 points or down .12% at 6840. This follows a huge 182 point move last Wednesday, when the Fitch upgrade to investment grade was announced. Although the April 1 market action of starting up almost up 100 points only to close slightly down during the day came close, it does not outright suggest a sell signal for the following reasons:

  • The April 1 pattern is not quite a dark cloud cover candlestick pattern as the April 1 close did not close at least 50% into the previous day’s white candlestick’s body. Nevertheless, it still could suggest a bearish reversal signal during a long uptrend.
  • Key reversal day- open was above the previous day’s close, it made a new intraday high but the close was not below the previous day’s close. However the lower close and the wide trading range concerns me.

buy on the rumor, sell on the news

This seemingly harmless move, however could indeed suggest the start of another correction for the following additional reasons:

  • The pattern of April 1 is similar to the pattern of Wednesday two weeks ago that signaled the start of a recovery but on the reverse.
  • As suggested by my last posting on What the Fitch Upgrade Might Mean, the upgrade does not necessarily mean a straight move by the PSE index to 8500. In fact, it might even be the unraveling of the Buy the Rumor, Sell the News phenomena. This is something that happens often. In anticipation of the upgrade, most of the traders bought stocks so when the actual event of an upgrade is announced there are no longer any buyers around. Instead the buyers that have bought during the run up now sell to lock in their profits, causing the market to move down. This might especially be true considering the upgrade might not necessarily suggest a booming economy ( again check my posting).

With the upgrade behind us, what will push an expensive market such as what we have up from here? Would soon to be reported earnings be enough?

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