Wanna trade on rumor? Trade the chart instead.
Discussed in this article: FedEx Corp. ( $FDX )
I want to look at FedEx ( NYSE:FDX ); specifically let’s talk about trading on rumors. Let’s assume you are not the guy who’s starting the rumor. What do you know? You know about a rumor that’s been disseminated from the guy; the guy meaning whether it’s a fund or the subject involved in the rumor, in this case not so; all you are is the person who’s heard the rumor like many other people.
So what edge do you have? You have no edge, you’re like one of those traders, I think it’s towards the end of “Trading Places,” where the brokers on the floor go, “Somebody knows something, come on let’s get in on it.” The bottom line is, there’s no advantage for you. What winds up happening is you can be quick and nimble and make some money, but generally speaking you’re the sucker, you’re the guy that’s taking the other side of the trade.
Here, if you look beneath the surface, you’ll see that the rumor is that Bill Ackman is going to takeover FedEx ( NYSE:FD ) or be an activist investor. FedEx ( NYSE:FDX ) is a big company, so you look beneath the surface and you realize that his fund is needing to raise one billion dollars in the next week in order to do this for a three-year lock-up period. So that’s pretty tough to do, particularly in a week. Also, it’s a secret that Mr. Ackman wanted to keep for obvious reasons; he doesn’t want somebody jumping in front of him.
So you quickly understand exactly what’s going on. The last thing you want to do is trade on some silly rumor just because it’s a rumor and you think you have the inside edge. I mean how many folks do I know who traded on “quote” stock tips? A bunch of them. How many folks do I know who have actually made money in trading on stock tips? None of them; similarly with a rumor, if you’re buying because of the rumor, sorry, I don’t want to offend you but maybe I’m going to offend you anyway; you’re kind of a knuckle head, you don’t understand the nature of rumors. Typically they don’t pan out and that’s why they’re a rumor, and by the way even if they do pan out, what’s that old saying? Buy the rumor sell the news. So a lot of times it’s a sell the news deal.
That wouldn’t be the case if a big chunk of FedEx ( NYSE:FDX ) is being bought, I doubt they’re going to buy the whole company, but that wouldn’t be the case if a big chunk of FedEx ( NYSE:FDX ) is bought. However, let’s look at the intraday chart, this is what I really want to get to. If you see a stock that’s trading on some rumor, I don’t mean a rumor that you and your buddies know about, I mean a rumor that is all over the financial media. Forget about the rumor, trade the chart, that’s really the lesson here. You see this stock moving, it’s not like the company beat earnings or anything like that, it’s a rumor that may or may not be true, that somebody is going to take a big stake in the company. It’s same thing as some rumor that one company is going to acquire another. Unless it’s actually announced, it is just a rumor.
You can then make money on this, as long as you trade it intraday, as long as you realize what’s happening, and you do this; you look for the volume to peak, which you only know it’s peaked after the fact, and that is when volume starts to taper off like it has here; you look at where the stock actually peaked at that point. So now you realize at this point, at this magical moment in time, when volume peaked, that’s when selling pressure started to pick up, at least where buying pressure gave way to selling pressure. And what happens? This stock comes up, prints a higher high, but frankly, if you’re trading the way you should be, you shouldn’t be in this move, you should have already taken profits. You missed the exact high, but only the liars get those, and then the stock rolls over.
So what happens the next day? Well the next day comes along and here’s your trade once again; stock opens up here, starts trading higher, once it breaks above this initial level here you’re off to the races once again from 103.00 to 106.00 or so, and then what happens? Volume picks up here, stock starts to drift, where’s all the buying? Nowhere to be found.
So where are we now? Well we’re setting up for Thursday. You know what I would do with this stock on Thursday? I would turn the page; if you want a stock to trade buy UPS ( NYSE:UPS United Parcel Service ) on a pullback. But here’s the other thing that you’ve got understand. Just because somebody’s going to take a big chunk in a company doesn’t necessarily mean that that company is going to turn around.
J.C. Penney ( NYSE: JCP ), this is another stock that Pershing Square hedge fund took a big stake in. How about Herbalife ( NYSE: HLF )? This is a common one, this one he’s been shorting; other than here when an SEC investigation that they started came to fruition and the stock plunged, where is it now? This is actually coiling for a move higher.
So my point is, just because, number one, you hear a rumor don’t trade on it. You can trade the chart, but don’t trade the rumor. Second, just because somebody’s going to take a big stake in it look at the prior track record, I’m not talking about the return of a particular hedge fund manager; this guy is returning an average of 16 percent a year, okay good for him, but bad for J.C. Penney ( NYSE: JCP ) holders, bad for Herbalife ( NYSE: HLF ) shorts.
So you don’t just want to follow along with someone for the sake of following along with them. Don’t always assume that just because a stock goes up it’s necessarily a good development; don’t always assume that just because a stock goes down it’s necessarily a bad development; you have to trade the chart. If you understand the rumor and you’re trading the chart you’re going to absolutely capitalize on these moves. You’ll make a bunch of money on these moves. But again, you’re not trading the rumor you understand the catalyst; now forget about the rumor trade chart.