Buy the Rumor - Sell the Fact

Have you ever wondered why a stock falls sharply in price right after it achieves a major milestone? You’ve probably seen companies, especially penny stock companies, drop significantly in price on the heels of an FDA clearance, strong financial results, or gaining a much anticipated patent grant.

Sirius Radio is one that comes to mind, with it’s penny stock shares dropping over 90% since they were finally given approval to merge with XM, after fighting for it for two years.

There’s an expression in the stock market that says, “buy the rumor, sell the fact.” The idea is simple. When there’s an outstanding rumor about an upcoming event for a company, investors buy in, thus pushing share prices higher. Once the event itself is actually realized, the share price loses that upward buying pressure, and the stock drops in value.

For example, ABC Inc. is a penny stock likely to get FDA approval for their new drug. The upcoming ruling is widely expected, and many investors buy in, speculating that the announcement will send the shares skyward. This starts pushing the penny stock price up.

Once the actually FDA approval is officially granted, the shares don’t spike much higher since the speculators had already run the share price up so much. Now that the announcement is out, many of those same speculators start cashing out, putting a great deal of selling pressure on the stock.

The following events are some examples of what might drive buying interest:
• impending patent award
• expected strong financial results
• new major customer or contract win that is widely anticipated
• upcoming release of a new version of their technology
• anticipated FDA clearance

Any such widely anticipated event would gradually push share prices higher. The penny stock would gradually increase, higher and higher, until the underlying event finally came to pass. Then speculative buying vaporizes, sellers come out of the woodwork, and shares start their descent.

For this effect to actually occur, the rumor or event needs to be:
• widely known
• growing in probability
• noteworthy (potential for a major impact)
• nearing the date it’s expected to occur

“Buy the rumor, sell the fact,” plays out again and again on the markets. It’s certainly not the exception, but rather the rule. Keeping this in mind will help you identify penny stocks that may trend upward, allowing you to ride the shares up for profits. Just make sure to escape your position before they come crashing back down to earth, and more realistic valuations. In other words, buy the rumor, sell the fact.

Peter Leeds is The Penny Stock Professional. Through http://www.PeterLeeds.com, we reveal high quality companies that have passed Leeds Analysis, and are poised to increase in price.

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How to Recoup Your Stock Market Losses

If you’ve suffered a 30, 40, or even 50% loss in this market, what’s on top of your mind right now is: how do I recoup it?

There are certain precepts that you have to accept before going any further, the #1 being that the stock market is still the greatest vehicle for creating (and destroying) wealth. If you agree, there is no reason to look for alternatives such as gold bullion or vintage wine. You just need to know how to use the stock market to your advantage.

A clean slate

The most important thing to realize is: you WILL NOT make your money back in the same vehicles that you lost it in. Every new bull market is powered by a new crop of leaders: technology, Internet, home builders, oils, ags… There is never a replay. If you are hoping for one, you are setting yourself up for a big disappointment detrimental to your financial health.

The lingering pain of recent losses clouds your judgment and impairs your action. Making a clean slate by getting rid of your losers may be very painful but the pain will subside as you stop the bleeding. Just don’t look back if any of your losers rebound. Only then will you have a clear unencumbered mind to go forward.

Basically, what happened, happened. There is no undoing or redoing it. You need a clean slate, and cash in the bank is it as far as stock investing goes.

New leaders

I don’t know who or what sector will lead the next bull market. Nobody does. Most predictions are cheap and worthless. But if you know how to recognize those leaders early on, you are half way there.

Learn from past mistakes

Look at the stocks you owned: they must have attracted you at some point for some reason. What was that reason? Chances are, it was valid, but you were late to the party and overstayed the welcome. Why didn’t you act sooner? If you can find out answers to these questions, you will learn how to recognize profitable patterns early on and apply them to new situations. It’s not the stock that makes you money, it’s what you do with it.

Learning from past mistakes can be applied broadly. If you are too busy in your professional life, you may not have the time to manage your portfolio and will need to hire a professional. Why did the one you had do so poorly? Did you choose lightly? Or did you like the guy but procrastinated too long to follow his recommendations? Did you chase performance by buying the hottest mutual funds of the previous year and churning your account? Did you listen to CNBC too much? Good professional advice is hard to come by and cannot be bought the way you buy flowers for your spring garden.

Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of timely stock picks in small caps based on proprietary selection methods - http://www.tradingzoom.com/

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