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Buy the Rumor…Sell the Fact?

Most people who have been involved with the markets for any length of time have heard that saying but it was never as true as last Monday’s price action on Monster Beverage Co. (MNST).  A little over two hours into the trading day, the Wall Street Journal reported that Coke was planning to get into the energy drink game and would buy Monster.  As you can guess, the price of the stock shot straight up on the rumor.

The problem was that it was just that, a rumor.  More and more news outlets picked up the story and the price of the stock jumped nearly $20 a share in less than 15 minutes!  After a large retracement, the stock settled a bit and even offered an intraday trade between a supply and demand zone that would have netted a trader a nice $4 per share on a $73 dollar stock.  Granted that was not the $20 per share that the news yielded, but it was a much safer and indeed a more predictable trade.

Near the close of trading for the day, a representative from Coke announced that there were no meetings and no intention of a takeover.  This caused more damage for those investors and novice traders who jumped on the rumor and watched as price plummeted about $11 per share in less than five minutes.

Traders need to make sure they trade based on logic and not emotion.  This is a prime example of where those who let greed take over their judgment were caught chasing price.  Smart traders who were patient were rewarded.

There is another side to this trade.  Remember there were two companies involved.  Usually when a company may be bought out, the shares of that company will rise.  We saw that with the actions of MNST.  But what about the company that is doing the buying?  What will happen to their stock?  Usually the price of the stock will drop as investors know it is a capital expenditure to buy another company.  There is the purchase price as well as the expenses of converting the assets and employees over.

So what happened to Coke (KO) today?  Their stock offered a safer, more predictable trading alternative for the news.  Price of the blue chip company rose just into a supply zone before dropping nicely into demand.  This gave traders a $1.00 per share profit for only $0.13 risk.  Again, a great trade within the rules of Online Trading Academy.

So stick to your trading rules to maintain low risk, high profit, and high probabilities in the market.  While it may seem incredible to chase the dream of mountainous gains in a short time, the reality is that most people likely just lost big.  I think this trader said it best on the Yahoo Finance blog about MNST.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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