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Why Traders Buy the Rumor, Not the News

Third quarter earnings season thus far has certainly been eventful, and the market still has well over halfway to go before all is said and done. In this week's interview with Toni Turner of

Third quarter earnings season thus far has certainly been eventful, and the market still has well over halfway to go before all is said and done. In this week's interview with Toni Turner of TrendStar Trading Group, we discuss how short-term traders approach these major announcements and where the opportunities may be.

EQ: We've seen a number of mega cap companies surge 10 percent or so after reporting earnings so far this season. If there was a stock on your watchlist that did the same, how would you play it? Would you be forced to chase it or wait until it comes back down?

Turner: I would wait because I don’t chase stocks, and I don’t buy the day an announcement drives the stock way up at the open or during afterhours trading the day before. If I ever do entertain that urge,, I certainly would not do so given the current market environment. It appears to be stretched rather thin here to me.

The NASDAQ is overbought, and the S&P 500 is trading at extremely high premiums to its major moving averages. The iShares Transportation Average ETF ($IYT) and the iShares Russell 2000 ETF ($IWM) are very strong but I also believe the angle of ascent in which they moved up in October is too steep to maintain much longer.  Paying retail prices for stocks in a nearly euphoric market is not on my list.

In certain cases, you might just have to let those opportunities go by, because you’re not focusing on just the ticker symbol, but the characteristics of how that stock is trading. So in those cases, I let them go. It has to meet my criteria, and if it doesn’t, then there are other opportunities around the corner.

EQ: A few weeks ago, we mentioned the "buy the rumor, sell the news" strategy, which is a very common on in the stock market. Why is it a bad idea to hold a trade throughout a news announcement?

Turner: You can hold an investment or a core trade that’s more of a long-term hold through a news announcement. But for any trade that is a short-term trade—one day to maybe a couple of weeks—it’s not something I care to do. We have to remember that the market is a forward-looking vehicle. It likes to anticipate what an asset will be worth in the future.

When we watch these news events approaching and prices go up, we know that the market operates on expectation. So when companies announce an earnings report or new products information, traders will buy on those expectations. They buy hope.

A company announcing good news can quickly see it become bad news if the market decides that the stock has gone far enough and wants to take a rest there. Of course, earnings announcements always add an element of risk. For that reason, I avoid keeping shares of short-term positions through those reports.

EQ: Are there any major earnings that you’re anticipating on for the coming week?

Turner: For next week, I’m watching Edwards Lifesciences Corp. (EW) before the bell on Monday. It’s a company based in Irvine, California, and it’s a health equipment and supplies company. It really got squashed over the last year or so. I’m watching it with great interest because I think it could gain more traction into the end of the year.

After the close, everybody is watching Apple (AAPL) . That goes without saying.

On Tuesday, I’m watching 3D Systems Corp. (DDD) . I’m anxious to see what kind of earnings they have coming out.

On Thursday, I’m watching ConocoPhillips (COP) before the bell to see how the large integrated oil companies are doing. After the close, I’m watching Camden Property Trust (CPT). It’s a REIT that specializes in multi-family residences, and I’m interested to see their earnings results.

EQ: Which sectors or industry groups are you watching right now?

Turner: In Toni’s Market Club, we’re looking at the Market Vectors Gold Miners ETF ($GDX) and Market Vectors Junior Gold Miners ETF ($GDXJ). They appear to have upward momentum from their basing formation.

I’m also watching the PowerShares DB Base Metals ($DBB). I’m going to see if it holds in this range. It looks ready to break out again, so I’m keeping an eye on it for a potential breakout to the upside.

I’m also watching the SPDR S&P Metals & Mining ($XME). In the short term, it’s overbought right now, but if it pulls back here and bounces off its 200-day moving average, and remains above  $38.25, then I’ll definitely be interested.