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A Classic Case of “Buy the Rumor, Sell the News”

There is always some truth to old trading adages. You may have heard a few of them, such as “the trend is your friend,” “do not try to catch a falling knife,” or “the bigger the base, the higher in space.” Today, we will be looking at “buy the rumor, sell the news.”

One of the best performing stocks in 2023 has been Nvidia. As hot-off-the-press terms like “AI” have taken markets by storm and companies are seemingly using the term to boost share prices, Nvidia has certainly been a benefactor.

Last Wednesday, after market hours, Nvidia announced its corporate earnings and guidance. In the days leading up to the announcement, the stock price saw single day surges of +7% (August 14th), +8.5% (August 21st), and +3% on Wednesday prior to the earnings announcement. Investors were optimistic and eager for an earnings beat. Over 15,000 users were in Nvidia’s comment section on Yahoo Finance awaiting the announcement.

To the cheers of stock owners, Nvidia beat corporate earnings estimates, and the stock surged after hours, topping +10%. The stock opened on Thursday up +6.6%. The stock closed flat on the day. In other words, all the demand for Nvidia stock that occurred in the after hours Wednesday, was quickly flushed out on Thursday, on heavy volume. Stock owners were eager to take profits. On Friday, the decline continued as Nvidia stock closed down -2.4%.

I am not here to make a comment on Nvidia as a company or the future of its stock, but this was a classic case of “buy the rumor, sell the news.” In the days preceding the earnings announcement, Nvidia’s stock went up in anticipation of an earnings beat. As the earnings news became public, investors rushed to the exit doors to cash in on their profits, leaving those who ordered in the after hours on Wednesday holding the proverbial “bag.”

The State of the Markets

As far as the markets are concerned, things are starting to look a bit “shaky.” The streak without seeing an outlier day (a trading day beyond +/-1.50%) continues as markets have now gone 76 trading days without an outlier. That streak almost came almost came to a close on Thursday, as markets nearly, but not quite, reached outlier territory. Market shakiness continued into the morning on Friday, before Jerome Powell apparently sparked some hesitance with the economy, but some optimism with investors. One article posted on Yahoo was titled “Stocks gain after Powell delivers cautious message.”

Traditionally speaking, August is in the heart of the “dog days of summer.” In the last 52 years, August has been the lowest average volume month in nearly half of those years. In other words, trading and volume (conviction) is not very high in the month of August. This August has mostly followed that same trend.

That being said, markets are starting to look a bit shakier and a bit weaker. We have seen some larger capitalized technology stocks start to show signs of slowing down, or even breaking down. Stocks like Apple, Microsoft, and Tesla have shown some recent weaknesses. Even a stock like Amazon, which reported strong earnings and rose by +10% on the announcement has “sold on the news” and given back most of the gain that came with the earnings announcement.

These large technology stocks could turn things around, the same as they have in the past, but the even bigger concern is the lack of strength being seen in smaller securities. For most of the summer, the relative strength of small cap stocks has been in line with the S&P 500 (which measures large cap securities). Now that the market has pulled back in August, however, small caps have seen declining relative strength when compared to large cap stocks. A healthier market environment would have small cap stocks leading large caps, not lagging them. You want the troops (small caps) out in front of the generals (large caps), not the other way around.

Market Sentiment

We have mentioned market sentiment in our last few updates. In the last AAII Investor Sentiment Survey, there were more bearish investors (36%) than bullish ones (32%). To begin the month of August, nearly half of all investors surveyed had a positive, “bullish,” outlook on the markets. As markets have declined, so has investor sentiment. This is the first time that bearish sentiment has exceeded bullish sentiment since May.

Keep in mind that the AAII Investor Sentiment Survey is a “contrarian” indicator, meaning that market declines are often preceded by high bullish sentiment, and rallies are often preceded by low bullish sentiment. Right now, bullish sentiment is right at its historical average.

Bottom Line

Nvidia has been a hot topic lately. The stock has seen an extraordinary, parabolic advance this year. As a company, it exceeded analysts’ expectations and the stock shot up right after the earnings announcement. That small “pop” was quickly wiped away. Investors bought on the rumor and sold on the news. This is a single day event, and we are not making a long-term judgement on the stock, but this example illustrates the nature of supply and demand.

The markets are getting choppier. The month of August is right in the “dog days of summer.” It is typically a weaker month and one that has lower volume. That being said, larger technology stocks have been weaker, and now small cap stocks are starting to lag the markets on the downside. That introduces some risk into the markets.


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