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“Buy the rumor; sell the news.” This is another Wall Street adage that was on prominent display in the markets today. Traders love to buy something as soon as a positive rumor comes out. They are all scrambling to get ahead of each other in the line to make the “easy” money. Once the actual news comes out and mom and pop investor eagerly place their buy orders these same traders are selling their shares to them. I tell this to novice investors and traders alike: there are a million professionals in the markets striving every minute of every day to take your hard earned money from you. This is one of the ways they do it.

Dell surged 15% or so midday on a rumor that it may be bought out by a private equity firm. No doubt a small group of traders accumulated stock prior to this rumor being released. The stock had sold off most of the morning on the news that holiday pc sales were pretty horrible but about 2 hours before the rumor came out the stock turned positive. Then the rumor hit the newswires and the stock surged. Eventually, we will find out if the rumor is true or not. Either way, traders will sell into the news. This is just how the game is played.

Another rumor hit the market today regarding Apple and its iPhone sales. The Wall Street Journal reported last night that Apple cut orders for iPhone components roughly in half last month. The report relies on anonymous sources and assumes the orders were cut due to lack of demand for the new iPhone 5. As you can imagine, traders eagerly jumped on the rumor. In this case, because the rumor is negative, it’s “sell the rumor; buy the news.” And I anticipate that traders will, indeed, “buy the news” as they normally do when it actually comes out on January 23rd during the company’s earnings announcement.

The reason I believe that traders will “buy the news” is based on more than just trader habits and adages. It’s based in fundamentals and sentiment. Apple sold 35 million phones in the first quarter of 2012. Analysts, who have scaled back their estimates partly due to rumors like this, still expect the company to sell 47.6 million in this year’s first quarter. That’s 36% growth year over year. Even if the rumors are true and they only sell 40 million phones that’s still growth of nearly 15% and for a company trading at only eight times last year’s earnings. Companies whose revenues are declining are valued at richer multiples so even a relative disappointment may turn out to be a positive for the stock price.

In terms of sentiment, it’s ironic that Apple, the most successful company in history, is now perhaps the most doubted and second-guessed. Hell, Dell and RIMM (the parent company of Blackberry phones) have seen their stock prices crush the performance of Apple’s. Folks are clearly pricing a great deal of pessimism into Apple’s share price and I believe it’s over done.

As Ben Graham famously wrote, ‘in the short term the stock market is a voting machine but in the long term it’s a weighing machine.’ This has never been more true than it is today. Today, stocks are pushed higher or lower by ultra-short-term algorithmic trading computers moving a massive amount of volume, not to mention the cabal of traders and speculators to whom fundamental due diligence is sacrilege. The short-term noise has never been louder.

Still, over the long run the stock market is an effective weighing machine calculating all the fundamental, technical and sentiment inputs into a pretty efficient price. Now don’t get me wrong; I’m not saying the market is efficient by any means. I’m just saying that the price trends toward and efficient value over time.

A stock is like a sailboat. The wind represents the direction of its underlying business. The stock price is the boat itself. Because it can’t sail directly into the wind it has to tack back and forth above and below its intrinsic value. If you look at it up close it looks pretty damn wild, going off course and pushed around by the waves and other obstacles like rocks and other boats. But the further you back away the straighter its path looks. Those tacks start to disappear and its path starts to look nearly straight.¬†Look at 20, 30 and 40 year charts and you’ll see a good picture of how the company’s business performed over that time. Look at a 3 month chart, on the other hand, and you’ll start to think that Dell and RIMM are much better companies than Apple.

This is one of the hardest things to do as an investor: stay focused on what matters, the long term, and don’t let yourself get caught up in the noise of the short-term. But it’s absolutely critical. Just ask any of the greats from Warren Buffett to Jim Rogers to John Templeton. One of the key things that made them successful is not only being able to ignore the noise but the ability to take advantage of the opportunities that arise when the short term facade diverges from long term reality.

“Buy the rumor; sell the news,” qualifies as noise for a long term investor. Learn to either ignore it or to take advantage of it but don’t ever try to play it. If you do, the odds are you’re just going to end up padding another trader’s performance.

Chart of the Day

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Well, the inverted head and shoulders pattern I suggested might be working for Apple was invalidated today as it made a new low. It wasn’t a very convincing, anyhow (I called it “unorthodox” at the time). What I really like about the chart, though, is that downside momentum is clearly waning. While the price made a new low, MACD, RSI and stochastics (not shown) are all diverging. If the price can reverse upwards back above $520ish it will confirm these divergences and a decent technical bottom could be formed.

Hit the Links

  • The Russell 2000 and Dow Transports Point to Higher Stock Prices (Hays)
  • The ticking time bomb in bond funds (CNN Money)
  • Why you should learn basic programming (Business Insider)
  • Apple cuts orders for iPhone parts (WSJ)
  • Did Apple really cut orders for iPhone parts? (CNN Money)
  • This is me: “now consumers can get an iPhone and fill it with Google” (NY Times)
  • Cat Beats Investors In Stock Market Challenge and I Wonder ‘When did the monkey get fired?’ (NPR)
  • Call It The Facebook Effect: After a Rocky Year for Tech Start-Ups, Investors Grow Pickier (NY Times)
  • Why you should quit diet soda and just drink more coffee (Bloomberg)
  • Here is how you can have privacy, Jodie Foster: Do not attend the Golden Globe Awards. (Gawker)
  • Hollywood is not to blame for gun violence but Tarantino’s tantrum only emboldens idiots who say otherwise (Salon)
  • Happy Birthday, Dave Grohl! Peace!