Why does "Sell the News" happen?
- Market Anticipation:
During the "Buy the Rumor" phase, investors drive prices up based on positive expectations. When the event finally happens, the market has already priced in those expectations, reducing the potential for further appreciation.
- Profit Taking:
Investors who bought during the speculation period seize the moment when the news is released to sell and lock in accumulated profits.
- Post-Event Disillusionment:
Often, the events do not meet the optimistic expectations, leading to a natural market correction, especially when the reality of the event’s impact is not as positive as anticipated.
- Psychosocial Effect:
The perception that “everyone is selling” can trigger mass sell-offs, amplifying the price drop.
- Liquidation of Leveraged and Impulsive Traders:
One of the most critical factors in the "Sell the News" phenomenon is the liquidation of leveraged positions. Investors who use leverage, in an attempt to maximize profits during the "Buy the Rumor" phase, may end up being forced to liquidate their positions when prices begin to fall after the event. This process can generate even more selling pressure, worsening the price drop. Furthermore, investors who made imprudent decisions, based on overly optimistic expectations or speculation, may be forced to close their positions, contributing to market volatility and accelerating the price decline. Leverage, when misused, can amplify losses during corrections, especially after significant events that fail to meet market expectations.