You've likely heard the adage, "Buy the rumor, sell the news," which is the tendency for traders to push up a stock's price on rumors or expectations and then sell once that news has been released, even if the news is positive. This phenomenon is often seen with stocks releasing earnings reports.

A stock's price is based in part on the expectations investors have for the firm's earning potential. When a company releases an earnings report, the market will react to this news by adjusting the firm's stock price accordingly. 

[Fundamental events may drive the price of a stock higher or lower, but technical analysis will show you how much higher or lower the stock is likely to go, making it an essential part of the equation. Investopedia's Technical Analysis Course will show you how to identify technical patterns, trends, signals and indicators to come up with optimal price targets, with over five hours of on-demand video, exercises and interactive content.]

If a firm issues an earnings report that does not meet Street expectations, the stock's price will likely drop. However, there are plenty of times when a company meets or even exceeds analysts' expectations and the share price falls. 

For example, let's say analysts expect XYZ Corp. to report earnings per share (EPS) of $0.75. Say the company announces EPS of $0.80, beating expectations by 6.7%, yet investors respond by selling shares. While the news was "good," perhaps investors expected more. For instance, if the firm has a history of beating estimates by 10% or more, this relatively smaller beat may be seen as a disappointment. 

Perhaps you've heard of something called the whisper number. This can refer to the collective expectations of individual investors, based on their own analyses of company fundamentals and/or feelings about a sector or stock, that is not published like analysts expectations are. Whisper numbers can be significantly different from the consensus forecast. Let's say in the example above, the whisper number for XYZ Corp. was $0.85 per share. By reporting $0.80 per share, the company fell short of what investors were expecting despite beating analysts' expectations. 

Another possible explanation for a sell-off following good news is related to noise traders. The term noise trader is generally used to describe non-professional investors, but it may also include technical analysts. Noise traders do not analyze the fundamentals of a prospective investment, but instead make trades based on news, technical analysis indicators or trends. They are often thought of as impulsive and may overreact to good or bad news. So, if XYZ Corp. begins to sell off after a positive earnings report, as described above, noise traders may jump aboard, exacerbating the down move.

While there are many possible explanations for a stock's value declining despite good news being released, the most important thing for an investor to do is remain calm and consider both the time frame for your investment and the reason you bought the stock in the first place. If you have a longer-term time horizon and the news does not go against, or perhaps even supports, your investment thesis, the sell-off may represent an opportunity to add to your long position at a lower price rather than a reason to sell. 

To learn more, check out the Stock Basics tutorial and Everything You Need to Know About Earnings.

  1. Why do stock prices change based on news reports?

    Stock prices move up and down due to fluctuations in supply and demand. Learn how this relationship is tied into news reports ... Read Answer >>
  2. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  3. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
  4. What is the difference between a long position and a call option?

    Learn what a long position in a stock is, what a call option is, and the difference between owning shares of a company and ... Read Answer >>
Related Articles
  1. Investing

    Technical Vs. Fundamental: Friends or Foes?

    Experienced investors debate which one—fundamental or technical—provides higher returns.
  2. Investing

    Blending Technical and Fundamental Analysis

    Find out how you can combine the best of both strategies to better understand the markets.
  3. Investing

    The Importance Of Tracking The Whisper Number (AAPL, FB)

    Don't let the name fool you: Whisper numbers are making themselves heard. Here's why you should be paying attention.
  4. Trading

    Technical Analysis Strategies for Beginners

    Technical analysis helps traders and investors navigate the gap between intrinsic value and market price by leveraging certain techniques.
  5. Trading

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
  6. Trading

    Debunking 8 Myths About Technical Analysis

    Here are common myths about technical analysis.
  7. Trading

    Introduction to types of trading: Fundamental traders

    Fundamental trading is a method by which a trader focuses on company-specific events to determine which stocks to buy and when to buy them.
  8. Trading

    Moving Averages

    Discover one of the most reliable indicators in technical analysis and learn how to incorporate it into your trading routine.
  1. Noise Trader Risk

    A form of market risk associated with the investment decisions ...
  2. Noise Trader

    Noise trader is generally a term used to describe investors who ...
  3. Stock Analysis

    Stock analysis is the evaluation of a particular trading instrument, ...
  4. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
  5. Position Trader

    A position trader is a style of trader who holds a position for ...
  6. Fundamental Analysis

    Fundamental analysis is the method of analyzing a security to ...
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center