“Buy the rumor, sell the news” is an old adage on Wall Street. It refers to investor tendencies to buy a company’s stock on a rumor of good things to come, and sell the stock when the actual news hits the wires.
Such may be the case when it comes to a possible CoVid vaccine announcement. No doubt the rumor has driven some of the markets gains and hopes. But will the news come into play with the actual announcement?
Although the common belief is that a vaccine will light the afterburners of stocks, my dad used to say when everybody thinks the same thing, nobody is thinking.
It is possible markets may go through some major upheavals when the announcement comes and in my opinion, when a vaccine is announced, there may be a major rotation of stocks bought and sold en masse, subsequently catching many investors and advisors by surprise.
When the CoVid shutdowns began, the market fell historically hard and most stocks fell in concert with each other. Indeed, the 38% crash of the Dow (DJIA) occurred in record time and obliterated an all-time Dow high, falling into bear market territory (down 20%) in about three weeks.
No sooner than the low was reached, a handful of stocks turned and headed higher in blistering speed. Although most stocks joined hands in the downward crash, only a handful of stocks reversed course.
Keen investors soon realized that although a huge number of companies would be devastated by the shutdown, some companies would not only remain unscathed but actually benefit from the new “stay at home” economy.
Those that fell into the trap of buying broad based index and mutual funds at the turn may have found these widely held and diversified vehicles did not rise in lock step with the news making companies whose share prices skyrocketed.
If there ever was a stock pickers market, it was then, and still is. Simply put, many companies held in a large fund basket would be hard hit, some possibly going under in the process. To participate in the selective recovery that occurred, one had to buy the right stocks and stay well away from wrong ones.
Stay at home stocks saw their sales explode as buying habits were drastically altered. With many people stuck in their homes, the internet traffic increased dramatically, and the companies that serviced it and sold their products through it saw their stocks quickly rise.
In contrast, the companies that depended on retail outlets, travel, transportation, entertainment and other brick and mortar business models languished. Indeed, some of these stocks have barely budged. It’s safe to say the markets recovery has been confined to a handful of stocks with many others still stuck in the mud.
That said, some of the stocks that benefited in the recovery have reached dizzying heights and have very expensive multiples.
In the opinion of some, this analyst included, there may be a surprise and viscous backlash on those companies whose stocks have exploded during the shutdown with a vaccine announcement. That historic announcement could slam in reverse the mindset and shopping lists of investors.
Investors may turn their portfolio gunsights away from the familiar high flyers and instead look for better bargains in the beaten down sectors that are still languishing.
The thought being these hammered companies whose share prices are still in the dirt may see their stocks race higher in anticipation of an opening economy and the release of a massive pent up demand from stir crazy consumers.
It is said for a stock being beaten up from bad news to turn, it doesn’t necessarily need good news. The news just has to stop being bad. A vaccine announcement would certainly qualify.
It may be wise for investors to step back from their love of certain stocks that have blasted off and instead consider what profits they may have made and look to preserve those profits. With a vaccine, there is no telling what will occur, what sectors will rise and what sectors will go in the opposite direction. I am of the opinion there will be a lot of money changing hands during a massive rotation that may take place starting the second the announcement is made.
It might be wise to consider that the stocks in the news today may also be in the news tomorrow for a whole different reason and many other surprise stock candidates may make up a new top 40 list.
Do you have your shopping list?