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Insight on Rumors
Every trading day, there are rumors that deem worthy enough to
be passed along to our subscribers.
We seek to provide you with information on the key rumors that
are affecting stocks and add our own real-time perspective, so
you can weigh the material. We do not pass along every rumor we
hear; only ones we deem actionable, and ones that we're hearing
from sources who have an established track record with us of
providing quality information.
Here is some insight on why we include such information in the
service and how those comments can be put to use.
Why We Include Rumors
Some armchair traders tell us that they eschew all tips, rumors,
hearsay and gossip, as such information simply cannot be
trusted. They like to deal with facts, and get much of their
information from wire services, regulatory filings, and
brokerage reports.
That's a naive opinion. Many of the professional traders we know
do keep close tabs on the rumor mill, as rumors can be the basis
of some short-term trades with stops. They can add additional
evidence to an opinion about a longer-term position or swing
trade. And in many cases, the talk on the Street can sway your
opinion about when to take profit, or cover a loss.
On a short-term basis, rumors can add a lot of volatility to a
particular stock or sector, which can present trading
opportunities.
For example, back on Aug. 10, 2006, we posted that we were
hearing unsubstantiated takeover talk about security software
maker Internet Security Systems (ISSX). And ISSX was taken over
for a premium by IBM just two weeks later.
Does It Make Sense?
The following facts made that particular rumor plausible: 1)
Consolidation in security software was inevitable. 2) ISSX was
known to have superior intrusion-detection technology that could
be desirable to an acquirer. 3) Stock traded at reasonable group
multiples. 4) Analysts had mentioned ISSX as a possible takeover
candidate as of early August. 5) Just days after we heard the
rumor, ISSX pulled out of a scheduled conference (suggested that
executives had more pressing matters, and didn't have anything
to say publicly at the time).
We also note that the technicals jibed with the fundamentals, as
ISSX formed a "hammer" on Aug. 10, a strong technical reversal
pattern.
A Reminder
Only a small percentage of rumors end up being true, of course.
But whenever possible, we also add commentary on whether we
believe the rumor to make sense. There's often an opportunity to
trade with the crowd, if a rumor does at least fall into the
realm of possibility. Remember, even if the rumor doesn't end up
being true, there are short-term profits to be had if enough
people believe an event is coming.
There are also times when it makes sense to trade counter to a
rumor, if there is evidence that the hearsay makes little sense.
For example, we sometimes hear takeover speculation about stocks
in unrelated industries; when we do, we'll post the information
on the rumor anyway, and that we think it is "bogus", or makes
little sense. Other times, there's takeover talk involving an
acquirer that has no track record of buying companies, or
doesn't have the equity to do so. It can present near-term
shorting opportunities for our subscribers.
Incremental Info
One of the best uses of rumors is to add more incremental
information to a set of substantiated facts you've already
gathered about a potential trade. If you already believe that
Aspen Technology (AZPN), for example, is sound fundamentally,
trades at low multiples, and is near a breakout point, a rumor
you may hear about IBM (IBM) seeking to acquire a software
company that caters to the oil and gas industry may provide the
catalyst needed to send AZPN shares to a confirmed breakout.
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