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Buying The Rumor Is 300% More Profitable Than Buying The News

Authored by Daniel Drew via Dark-Bid.com,

As the market meanders its way through a post-earnings, pre-Fed no man's land, I couldn't help but wonder if this was a unique aimlessness or a seasonal pattern.

The market is partly driven by quarterly earnings cycles, and one has to wonder, "Does the earnings hype always live up to expectations?" Not only do individual stocks move up and down around earnings announcements, but the entire market exhibits certain behavior as well.

As earnings season approaches, volatility picks up along with investors' expectations, and stocks rise in the first month of the quarter. After earnings season ends, reality sets in and stocks underperform, much like they are doing now. If an investor had only been long the S&P 500 in the first month of the quarter since 1990, they would be up 150%. Anyone buying in the 3rd month of the quarter only gained 50%.

In financial markets, hope is more profitable than reality.