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Have you ever wondered why the price of a stock falls when a company reports positive results?
It’s a perfect time to discuss this peculiar phenomenon, given we’ve reached the middle of reporting season.
Let’s take the case of A2 Milk Company (ASX:A2M).
In August last year, the company reported positive FY23 results with a 10.1 per cent increase in revenue. While this was good news, the stock dropped 13 per cent on the same day and only recovered five months later, last month (January 2024).
This situation is not unique and happens routinely throughout every reporting period, leaving many investors confused. 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 is often a reflection of 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 is the best time to buy or sell a stock.
To give you another example, if you looked at the chart of A2 Milk before August last year (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 next week. Now, I don’t have a crystal ball, but given the share price is up over 30 per cent from its lows in November last year, I’m expecting 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.
Best & worst-performing sectors this week
The best-performing sectors include Information Technology, which was up more than 5 per cent, followed by Consumer Discretionary, up more than 3 per cent and Real Estate, which added more than 2 per cent. The worst-performing sectors include Health Care, down more than 4 per cent, followed by Energy, down over 3 per cent and Materials, down more than 2 per cent.
The best-performing stocks in the ASX top 100 include Altium (ASX:ALU) which has traded up more than 28 per cent, followed by Downer Edi (ASX:DOW), which gained 16 per cent, and AMP (ASX:AMP), up over 14 per cent. The worst-performing stocks include Seek (ASX:SEK) and CSL (ASX:CSL) as they are both down more than 7 per cent, followed by S32 (ASX:S32), which was down more than 6 per cent.
What’s next for the Australian stock market?
This week, the All-Ordinaries index has fallen under 1 per cent to continue the downtrend of the previous week. While a two-week fall on the Australian market may raise some concerns, it depends on how you look at it.
The current move down from the February high of 7934.90 points equates 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.
Bull or Bear?
The rise up to the February high 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 past 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 in the next week, especially if we see a high close today.
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. 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 is the best performer this week, so I encourage you to look at this sector, as these stocks will likely benefit the most when the bulls re-enter the market.
If the market turns to rise next week, as I anticipate, I believe it will challenge and possibly break the all-time high. However, it could find support around 7,500 points if it continues to fall away.
For now good luck and good trading.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
The material provided in this article is for information only and should not be treated as investment advice. Viewers are encouraged to conduct their own research and consult with a certified financial advisor before making any investment decisions. For full disclaimer information, please click here.
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