As you likely know by now, stocks tend to be volatile. In fact, some are extremely volatile and can fluctuate more than 50% in a single day — in special cases. Further, Wall Street analysts are constantly attempting to project the price of stocks in order to give their firm/fund a competitive advantage. Interestingly, in some cases, a company will beat the earnings estimates for a specific quarter, indicating that its stock price should rise, but it does not always happen. In fact, it is not too unheard of for a stock’s price to decline following an earnings report that was better than projected. Why is this? While there is no simple (and universal) answer, there are usually indicators that can help point towards the answer in each specific situation. The reason for the decline is likely not particularly obvious, though. As such, here are two reasons that a stock’s price might decline during a time that many would not suspect:
In some cases, institutional investors or high net worth individuals with a significant amount of equity in a single company set a target sell price. Similarly, some of these investors also make plans to sell following specific events that they determine are important indicators. Consequently, when relatively large amounts of shares are being sold at the same time, the market becomes saturated. Accordingly, this means that the huge increase in available shares will drive the stock price down. Fortunately, even an average investor might be able to determine if a major shareholder is selling out of their position through the use of the individual trade volumes on time and sales reports. For example, typical individual investors make trades in the hundreds/low-thousands of shares range, while institutions are known for selling stocks tens of thousands of shares at a time. As such, by looking at the available data, you might be able to determine if the share price of a stock is being driven down by a significant sell-off situation. If that is the case, it could even potentially be a great buying opportunity once the sell-off has subsided.
Non-Supportive Research Notes
A research note is a statement from a brokerage firm, or other investment advisory service, that addresses a specifically chosen stock, industry, market, or news item. Moreover, these notes generally contain time-sensitive information that applies to the trading day of their release or a particular future event. One such event could be the release of a company’s earnings. Interestingly, these research notes can have a significant impact on trading, especially if coming from a reputable sell-side analyst. For instance, if a report is negative or non-supportive, some clients might become turned off to the company. If this happens, there is often a natural pressure to sell among investors. Further, not all individual investors have direct access to these reports, but large news mediums will often announce that a report has been issued. Similarly, the firm issuing the report might themselves announce pieces of it to the general public. Parallel to the potential for an informed individual investor to determine a significant sell-off, such an investor could also recognize a price dip due to non-supportive research notes. If no fundamental changes have been made to the company in question, perhaps the selling and price dip is just due to artificial pressure.
Although it can be well hidden, there is almost always a reason behind a stock price dip. As result, it is entirely possible for individual investors such as yourself to “get to the bottom” of the dip and identify the tangible reason in the same way that a detective solves a crime. However, doing so can be quite difficult and require a lot of due diligence. Luckily, those who are up for the challenge and successfully identify the cause for the dip might be able to put themselves in position for a great reward if/when the price hits its bottom and turns back upwards!