What is 'Reaction'

A reaction is a reversal in the movement of a security's price. Reaction is most often associated with a downward movement in the price of a security after a period of upward movement, as investors sell off shares or decrease the volume of buy orders for fear of the security being overvalued. Reactions are likely to be mild and lead to a slight increase or decrease in price, rather than a large change in value. A reaction is similar to a correction but lacks the same intensity.

BREAKING DOWN 'Reaction'

Reactions are generally considered to be positive for the overall health of the market, since unending price increases can cause inflation or result in an even larger price drop if a company doesn't meet expectations. A reaction is likely to prevent events such as runs or high volume sell offs at later dates.

When a stock has a downward reaction in price, it is often because of negative news. Negative news will often cause individuals to sell stocks. Negative news can be bad earnings reports, poor corporate governance, economic and political uncertainty, as well as unexpected, unfortunate occurrences will translate to selling pressure and a decrease in stock price.

On the other hand, positive news will normally cause individuals to buy stocks. Positive news might be good earnings reports, increased corporate governance, new products and acquisitions, as well as positive overall economic and political indicators, translate into buying pressure and an increase in stock price.

For example, a hurricane making landfall may cause a drop in utility stocks. Meanwhile, depending on the severity of the storm, insurance stocks could also take a hit on the news.

Reactions and News Reports

In general, news releases result in a rapid increase in volatility, but the effect is mostly short-lived and subsides within the first minute. For example, a study on how quickly the U.S. fixed income markets incorporate new information found that a considerable portion of the changes in interest rates can be attributed to scheduled macroeconomic announcements, such as employment reports and inflation data. The major adjustment to the information released (and the window for trading profits) lasts about 40 seconds.

A study on after-trading-hours quarterly earnings announcements of 100 NYSE and 100 NASDAQ firms found that the most price reactions are realized during opening trading. Earnings announcements that occurred during trading hours caused adjustments to occur very quickly; for NYSE stocks, the price adjustment occurred during the first several post-announcement trades; for NASDAQ stocks the price adjustment was concentrated in the first post-announcement trade. Thus, U.S. markets seem to be quite efficient at processing information and incorporating that information into valuations.

RELATED TERMS
  1. Announcement Effect

    Announcement effect is the impact of news, especially issued ...
  2. Air Pocket Stock

    An air pocket stock is an example of a stock that has suffered ...
  3. News Trader

    A news trader is a trader or investor who makes decisions based ...
  4. Material News

    News released by a company that might affect the value of its ...
  5. Correction

    A correction is a reverse movement, usually negative, of at least ...
  6. Basing

    Basing refers to a period in which a stock or other traded security ...
Related Articles
  1. Trading

    How To Trade The News

    Regardless of your investing horizon, learning to trade the news is an essential skill for astute portfolio management and long-term performance.
  2. Investing

    How to Find Beaten-Down Stocks That Bounce Back

    Industries may go through hard times, but these downturns can create solid investment opportunities for value investors when battered stocks bounce back.
  3. Trading

    A Guide To Finding The Most Actively Traded Stocks

    Knowing the trading volume of a stock helps traders understand price movements and forecast future movements. This short guide helps investors locate actively traded data.
  4. Trading

    Activities to take advantage of in pre-market and after-hours trading

    Learn how to access opportunities and hedge risk outside regular trading hours.
  5. Financial Advisor

    Why Positive Economic Data Pushes the Market Down

    Unemployment comes in higher than analysts’ expectations, and the market rallies 1% instead of dropping. GDP growth exceeds expectations slightly, and markets drop. Why could this be happening?
  6. Trading

    When And How To Tackle Earnings Reports

    Trading earnings news for consistent profits requires considerable discipline and patience.
  7. Investing

    Blending Technical and Fundamental Analysis

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

    The Top Sites for the Latest Stock Market News

    News drives the markets for short term price movements. Which websites offer timely, accurate and reliable access to news for trading and investments?
  9. Trading

    Eight Factors That Affect Daily Trades

    Find out which factors can help you squeeze more profit out of each position.
  10. Insights

    Inflation's Impact on Stock Returns

    Learn about the impact inflation can have on stock returns. Find information on what types of stocks perform during times of high inflation or low inflation.
RELATED FAQS
  1. How do traders implement the Buy a Bounce Strategy?

    Learn how traders execute the buy a bounce strategy for a security that has reached an important support level. Find out ... Read Answer >>
  2. What causes a significant move in the stock market?

    There is a nearly infinite number of factors that can cause the stock market to move significantly in one direction or another. ... Read Answer >>
  3. What trends and data influence after-hours traders the most?

    Learn about the specific information that after-hours traders review to influence their trading. Read Answer >>
  4. Why would my stock's value decline despite good news being released?

    There are many possible explanations for a stock's value declining despite good news being released. Investors should remain ... Read Answer >>
Trading Center