DBD Strategy Daily - Should you buy the Italian budget ?
Is the Italian 2.4% deficit already priced ? Should you trust the famous phrase "Sell the rumour, buy the news"? Academic literature on news flow and its impact on prices usually concludes that there is no correlation. Correlations do exist over short periods, but they are not stable, they are therefore useless. For most technical analysts, news flow can be completely ignored. We stand somewhere in between. News have to given a different consideration depending whether prices are in a trend, or in a potential reversal pattern. In a consolidation (a potential reversal pattern), you should trade against the news, and therefore follow the adage. If you are in a trend, you can ignore news. They will usually increase the speed of the trend when they confirm it, and they will cause a reaction against the trend for a short time when they contradict the trend. As we have a rising trend on Italian yields and a falling trend on Italian Equities, you can theoretically ignore news. What you cannot do is trade against them when they confirm the trend. Buying Italian Bonds today is a very daring attitude we cannot support...
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