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Why do stocks go down despite good results?

Saturday, October 24, 2009 Leave a comment Go to comments

A reader asked me :

“I have 100 L&T at Rs.1660. I cannot understand even though its performance for Q2 is good, this scrip has come down to Rs.1558…!!! Why? On what basis the market is traded?”

Analysts have this funny way of “explaining the stock moves”. If the stock moves down on good results, it is said that expectations were “missed”. On the other hand, a stock moves up even after bad results because of “better than expected” results. How do you define these “expectations”? Even if you look at broker reports, there is wide range of these “expectations” because all of them are based on different assumptions and estimates.

Now most of us know how good these “predictions” are. A recent example was the forecasting of UK GDP – “GDP fell 0.4 percent from the previous three months, the Office for National Statistics said today in London. Economists predicted a 0.2 percent increase, according to the median of 33 forecasts in a Bloomberg News survey. None forecast a contraction.” The best of the best couldn’t predict the direction of UK economy!

Also you might have observed that markets are good at pricing these expectations in advance. Many stocks have already doubled or tripled in price since March in expectations of good results. So why  do we feel surprised if stocks fall down after delivering good results? They simply failed to meet the ever growing expectations.

This is also the reason why ” market news” is not very important but how the market reacts to that “news” is much more important. A bullish stock might continue to go up despite negative news while a bearish stock might continue to go down despite good news!

If you select your stocks solely based on news flow, you might be in for nasty surprises.

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