A phenomenon that has both baffled and fascinated market watchers for generations: "Buy the rumor, sell the news."
It's a dance between anticipation and realization, where investors buy up stocks on positive rumors and then sell once the news is officially announced.
Even if the news is great, the stock can plummet once it’s released.
Why does this happen?
Let's explore this intriguing concept and then turn our attention to Nvidia (NVDA), a company that might be on the brink of experiencing this very phenomenon.
"Buy the Rumor, Sell the News" Explained
- Expectations Already Priced In: The market often prices in anticipated good news, driving the stock price higher. Once the news is released, there's no new catalyst to push the price further, leading to profit-taking.
- Overhyped News: If the news is good but not as extraordinary as expected, investors might decide to sell, even if the news is objectively positive.
- Short-Term Traders: Many traders buy leading up to significant news events, planning to sell immediately afterward, leading to a sudden influx of selling right after the big event.
- Psychological Factors: The fear of missing out (FOMO) followed by the realization of gains can drive this phenomenon.
NVDA's Upcoming Earnings Report
NVDA's shares have soared over 130% in the past year, and the excitement is building ahead of the company's eagerly awaited Q2 earnings report.
The options market is pricing in a nearly 12% move on the earnings report, signaling high volatility and uncertainty.
Price Targets Boosted
KeyBanc and HSBC have increased their price targets for NVDA this morning, adding another $20/share to the stock's already impressive rally.
There could be limitations on NVDA's near-term sales forecast due to supply constraints, but potential offsets in China for the AI market leader add complexity to the earnings anticipation.
Investors expect NVDA to forecast quarterly revenue above estimates. The shares have tripled in value this year, making it the first trillion-dollar chip firm.
The significant rally means that there's little room for any earnings-related disappointment. Anything less than a higher-than-expected forecast could trigger a significant drop in the stock.
NVDA's upcoming earnings report is a high-stakes event, filled with anticipation, opportunities, and risks.
The "buy the rumor, sell the news" phenomenon looms large, and the stage is set for a classic example of this market behavior.
With the stock up over 130% in the past year and the options market bracing for a significant move, investors and traders must approach the earnings with caution and awareness of market psychology.