You’ve probably heard the saying “buy on rumor, sell on the news”, which is the tendency for traders to push up the stock price on rumors or expectations and then sell once the news was released, even if the news is positive. This phenomenon is often observed with stocks releasing earnings reports.
The stock price is partly based on the expectations of investors on the potential of the company. When a company produces a profit, the market will react to this news by adjusting respectively the price of shares of the company.
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If the firm reports a profit, which does not match the expectations of the Street, the stock price probably will decline. However, there are many times when the company meets or exceeds analysts ‘ expectations, and the stock price falls.
For example, analysts expect that the XYZ Corporation report earnings per share (EPS) of $0.75. Say the company announces EPS at $0.80, exceeding expectations by 6.7%, but investors reacted by selling shares. Although the news was “good”, perhaps investors had expected more. For example, if the firm has a history of beating estimates by 10% or more, it is relatively less beat can be seen as a disappointment.
You may have heard about something called the whisper number. It can refer to the collective expectations of private investors, based on their own analysis of the financial results of the company and/or feelings about any sector or stock that has not been published as the expectations of analysts. Whisper numbers may differ significantly from the consensus forecast. For example, in the above example, the whisper number for XYZ Corp. was $0.85 per share. Reporting $0.80 per share, the company did not meet what the investors expected, despite exceeding analysts ‘ expectations.
Another possible explanation for the sale of the following good news related to traders noise. Trader the term noise is commonly used to describe non-professional investors, but may also include technical analysts. Traders noise is not to analyze the fundamentals of a prospective investment, but instead make trades based on news, technical indicators for market analysis or trends. They are often thought of as impulsive and you may over-react to good news or bad news. So, if the XYZ Corporation starts to sell after a positive earnings report, as described above, noise traders can jump on Board, exacerbating the fall.
While there are many possible explanations for the stock price declining despite the good news, the most important thing for investors to do is stay relaxed and consider how the time frame for your investment and the reason you bought the stock in the first place. If you have a long-term time horizon and the news does not go against, or perhaps even support, your investment thesis, a sale can represent an opportunity to add to long positions at a lower price than the reason for sale.
To learn more, check out stock basics tutorial and everything you need to know about earnings.