Why do Stocks Fall when they Announce Positive Results?

Have you ever wondered why the price of a stock falls when a company reports positive results? It’s the perfect time to discuss this peculiar phenomenon, given we have reached the middle of reporting season.

Let’s take the case of A2 Milk. In August last year, the company reported positive FY23 results with a 10.1 per cent increase in revenue. While this is good news, the stock dropped 13 per cent on the same day and only recovered five months later in January 2024. This situation is not unique and happens routinely throughout every reporting period, leaving many investors confused.

How do you assess a company’s stock price during reporting season?

This disparity lies solely in how the market interprets this information. You have to remember millions of opinions are floating around, so while some news may appear positive to one investor, it may be negative for another. To tackle this conundrum, we have to make a few assumptions.

The first is that the market is not efficient, and the price of a stock will not always reflect the company’s fundamental value. This means that the stock price often reflects the anticipation and speculation of future results.

So, what can we do if we can’t accurately assess a company's stock price based on what it reports? You need to rely on the price of a stock as it appears in the charts, as this is the only transparent piece of unadulterated information available. This allows a skilled technical analyst to decide when the best time is to buy or sell a stock.

To give you another example, if you looked at the chart of A2 Milk before August 2023, the stock had been falling for 8 months with no opportunity to enter. Given this, I would not have bought the stock regardless of what they reported in August.

Looking ahead, A2 Milk is due to report interim results on 19 February. I don’t have a crystal ball, but given the share price is up over 30 per cent from its November 2023 lows, I expect some good news to come out of this report, which could present a potential buying opportunity. However, don’t be surprised if the share price falls on the release of positive news, as some investors may have expected better results.

When deciding whether to buy or sell a stock, I encourage you to look at the price chart, as it provides the best picture of whether the stock is likely to go up or down and whether to buy or sell, which is even more critical during reporting season.

What were the best and worst-performing sectors last week?

The best-performing sectors included Information Technology, up 6.20 per cent, followed by Consumer Discretionary, up 4.50 per cent and Real Estate, up 2.62 per cent. The worst-performing sectors included Health Care, down 4.86 per cent, followed by Energy, down 2.15 per cent and Communication Services, down 2.02 per cent.

The best-performing stocks in the ASX top 100 included Altium, up 28.13 per cent after they agreed to a takeover bid, followed by Downer Edi, up 16.32 per cent and AMP, up 14.36 per cent. The worst-performing stocks included S32, down 8.28 per cent, followed by CSL, down 6.89 per cent and Seek, down 5.23 per cent,

What's next for the Australian stock market?

At one stage last week, the All-Ordinaries index had fallen just under 2 per cent to continue the downtrend of the previous week. However, just like in the past few years, in the second half of the week, it did the opposite of what it did in the first half and, surprisingly, closed 0.27 per cent up for the week.

While a two-week fall on the Australian market may raise some concerns, it depends on how you look at it. The move down from the February high of 7,934.90 points to last week's low equated to a fall of around half of the prior rise from the 7,551-point low in mid-January to the February high.

You may be wondering why this is important. The rise to the February high also occurred over two weeks, so now the buyers and sellers have had two weeks to state their case as to whether the market is bullish or bearish. Given that the sellers have only pushed the market down in the last two weeks half the price of what the buyers gained in the prior two weeks means the sellers are not as strong, which is a bullish sign. As such, I now anticipate a reversal and for price to trade up this week and for the next two to four weeks.

What I like to do when the All-Ordinaries index is falling is to take that time to analyse every sector to see whether there are any outperformers relative to the index. Performing this kind of analysis gives me great insights into where the smart money is going, allowing me to easily identify stocks to add to my watch list.

Information Technology was the best performer last week mainly due to the takeover bid of Altium; however, I encourage you to take a good look at this sector, as these stocks are likely to benefit the most over the next few weeks or more.

Right now, I believe the market is bullish and will challenge or potentially break the all-time high this week. That said, don’t be surprised if we get some volatility around the current levels.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.