Why Stocks Can Drop After Good Earnings

by Jeremy Lieber | Oct 28, 2023 | Day Trading Knowledge

Every quarter, companies announce their earnings to the public. It’s a time of excitement and anticipation for investors and traders alike. Positive earnings can lead to a jump in share prices, but not always. Sometimes, stocks can drop after a report of good earnings, and this can be confusing and frustrating for investors. Understanding the reasons behind these drops is crucial for traders who want to succeed in the market. In this post, we’ll explore the factors that can cause a stock to drop after good earnings and what traders can do to uncover why.

Factors That Can Contribute to a Stock Dropping

Regarding the stock market, surprises can range from exciting to downright devastating. It can be incredibly frustrating to hear that a company you invested in beat analyst expectations only to see its stock price drop. Unfortunately, this is a common phenomenon in the world of trading. While several factors can influence the value of a stock, some of the most significant factors include changes in management, weak guidance, buy the rumor and sell the news strategy, lack of volume buyers, and share buybacks. Let’s take a closer look at each of these.

Changes in Management

Investors may be quick to sell off their shares if a company experiences a change in management, even if they just reported impressive earnings. When a new leader takes over, there is always a new level of uncertainty surrounding the company’s future direction and performance. This hesitancy can cause a dip in stock prices, as investors are unsure how the new leadership will navigate the company’s growth. If the leadership is untested or unproven, it only adds to the apprehension and can cause a more significant drop in share prices. While earnings reports are critical benchmarks for investors, management changes can majorly impact a company’s future success.

Weak Guidance

Weak guidance is a situation where a company forecasts future earnings that are lower than analysts’ expectations. Essentially, investors may start to doubt the company’s ability to perform well over the long term, which can cause the stock price to decrease. So, while earnings reports are essential, savvy investors must also pay attention to guidance.

“Buy the Rumor, Sell the News” Strategy

This is a common trading strategy where investors buy stocks based on rumors of positive news and then sell them once the news is officially announced. This can cause a temporary boost in share prices as investors rush in to capitalize on the good news. However, once the news is out, the value can drop as quickly as it rose.

Lack of Volume Buyers (Liquidity)

Liquidity refers to the availability of buyers and sellers in the market. If there aren’t enough buyers interested in purchasing the shares at the current price, there’s no upward pressure to keep the stock price at its current level. This means that as sellers begin to outnumber buyers, the price can start to dip, regardless of how well the company is doing financially.

Share Buybacks

Share buybacks are when a company buys back its shares from shareholders. While this can increase a stock’s earnings per share, it can also decrease the number of outstanding shares, causing the stock price to appear inflated. If investors view this as unsustainable, they may sell, causing a price drop.

Panic Selling and Its Impact

Panic selling is when investors sell their shares in a company because of fear, uncertainty, or doubt. This can cause a rapid drop in share prices, often during economic turmoil or when there’s negative news about a company. The impact of panic selling can be damaging, especially for those unprepared for it. It’s essential for traders to stay calm during market downturns and not let their emotions dictate their decisions. Sticking to a long-term investment strategy may help you weather the storm during periods of volatility.

How Traders Can Uncover the Reasons for Price Drops

As a trader, it’s essential to investigate why a stock has dropped. Traders can use various tools to uncover the reasons behind a price drop, including technical analysis, news and social media analysis, and fundamental analysis. Technical analysis involves looking at charts and identifying patterns and trends. News and social media analysis involves monitoring news outlets and social media platforms for any news or discussions about the company. Fundamental analysis involves looking at a company’s financial statements, industry trends, and other macroeconomic factors that could impact the stock’s price.

Stocks can drop after good earnings, and several factors can contribute to this. Understanding these factors is crucial for traders who want to succeed in the market. While panic selling can be damaging, it’s also an opportunity for traders to buy undervalued stocks and profit from the market’s recovery. To be successful in trading, it’s essential to stay calm, do your research, and always be prepared for the unexpected. By following these tips and strategies, traders can become more successful and confident in their investments. If you need any help with your trading journey, please get in touch with Uncommon Education Trading. Uncommon Education Trading is here to support traders and help them grow their careers through education and mentoring. So keep learning, stay informed, and happy trading! See you at the top of the market!

Understanding Stock Market Seasonality: Strategies and Trends

by Jeremy Lieber | Oct 27, 2023 | Day Trading Knowledge

As an investor, you may have already heard about the concept of seasonality in the stock market. Simply put, seasonality refers to the tendency of stocks to perform differently based on the time of the year. Traders widely recognize this phenomenon, which has been used to develop trading strategies that capitalize on these trends. In this blog post, we will provide an overview of stock market seasonality, its importance, and the trading strategies that can be used to take advantage of these trends. Whether you are a beginner or a seasoned investor, understanding seasonality can help you make more informed decisions and potentially generate higher returns.

The Importance of Stock Market Seasonality

As investors, we all want to make the best possible portfolio decisions. One factor that can help us achieve this goal is understanding stock market seasonality. By analyzing patterns and trends based on the time of year, we can gain valuable insights into which industries and sectors may perform better in certain months. For example, the retail industry tends to see increased activity during the holiday season leading up to Christmas. By recognizing these seasonal patterns, investors can adjust their strategies accordingly and potentially improve their returns. However, it’s important to remember that there are always outliers and unexpected events that can disrupt the typical seasonal trends, so it’s crucial to stay vigilant and adapt to changing circumstances.

The “Sell in May and Go Away” Strategy

One of the most well-known and popular seasonal strategies is the “Sell in May and Go Away” strategy. This strategy is like taking a break from the stock market during the summer months. Like people take vacations during this time, investors sell their stocks in May and re-enter the market in November. The strategy aims to avoid the traditionally weaker summer months when trading activity tends to be lower and market performance may be more fragile. While the strategy has been popularized over the years, its historical performance is mixed. Some years have seen significant market declines during summer, while others have produced positive returns. Factors such as political and economic events can also impact market performance and make the strategy less effective.

The Santa Claus Rally

Another seasonal trend that investors look out for is the Santa Claus Rally. This phenomenon occurs during the last week of December and January’s first two trading days. The Santa Claus Rally is characterized by strong market performance and is attributed to factors such as holiday spending, year-end portfolio adjustments, and tax-loss selling. Historically, the Santa Claus Rally has been a reliable trend, with positive returns in over 70% of the years since 1969. However, like any trading strategy, there are no guarantees and market conditions can quickly change.

Stock Market Holidays

Market holidays can also affect stock prices and create seasonal trends. For example, the market tends to be closed on national holidays such as Thanksgiving and Christmas, resulting in lower trading volumes. This lower trading activity can increase volatility in the days leading up to the holiday or a few days after. Additionally, some market holidays, such as the Chinese New Year, can impact the performance of specific sectors or industries. Trading around market holidays can be challenging, but there are strategies that investors can use to take advantage of these trends. For example, traders may buy stocks before a holiday if they expect positive market performance or sell stocks if they anticipate a decline.

Tax Loss Harvesting/Selling Seasonality

Finally, the tax loss harvesting or selling seasonality can also be used as a trading strategy. This strategy takes advantage of the tendency of investors to sell their losing positions at the end of the year to offset capital gains taxes. Lower selling pressure during the year’s first quarter can result in a bounceback in stocks sold at a loss at the end of the previous year. The historical performance of this strategy has been mixed, but it can be a valuable tool for investors looking to minimize their tax obligations and potentially generate higher returns. In conclusion, understanding stock market seasonality can provide helpful insights into market trends and investor behavior. While seasonality can be a practical guide, it is essential to remember that markets are complex and subject to unexpected changes. Like any trading strategy, there are no guarantees, and investors should always carefully consider their risk tolerance and financial objectives before making investment decisions. Nonetheless, by recognizing and effectively trading around seasonal trends, investors can potentially enhance their performance, minimize risk, and take advantage of seasonal opportunities in the market. Check out the free Masterclass from Uncommon Education Trading to learn more about seasonality and other valuable trading strategies. So, it’s always a good idea to keep an eye on seasonal patterns and use them as one factor in your overall investment strategy. Keep learning, stay informed, and happy investing!

Understanding the Alternative Display Facility and its Role in Off-Exchange Trade Reporting

by Jeremy Lieber | Oct 27, 2023 | Day Trading Knowledge

The Alternative Display Facility (ADF) is not a well-known term in the trading world, but it plays an essential role in off-exchange trade reporting. The ADF is a trade reporting facility operated by the Financial Industry Regulatory Authority (FINRA) designed to cater to a niche concern. The importance of off-exchange trade reporting infrastructure cannot be overstated, as it ensures transparency and fairness in the trading market. This blog post will delve into the ADF and its role in off-exchange trade reporting.

What is the Alternative Display Facility ADF

In the fast-paced world of finance, institutions need a virtual billboard to post quotes and report trades that don’t happen on exchanges. The Alternative Display Facility (ADF) acts as this billboard, serving as a display-only platform run by FINRA. It’s like a billboard where institutions can showcase their off-exchange trades. While it doesn’t execute trades, the ADF is vital in ensuring fair and transparent markets. Whether you’re an experienced trader or new to finance, understanding the ADF is essential in today’s rapidly changing market landscape.

Comparison of Trade Reporting Facilities

Regarding reporting trades in the United States, there are two primary facilities to consider: the Trade Reporting Facility (TRF) and the Alternative Display Facility (ADF). The TRF stands out as the more significant player since exchanges operate it. On the other hand, the ADF is a niche player, catering to a specific industry concern. However, since the introduction of Reg NMS, the volume of trades reported by the ADF has dropped significantly. Broker-dealers haven’t been quoting on the ADF for a while, but JP Morgan still uses it for trade reporting. Overall, understanding the differences between these two facilities is crucial for traders who want to stay informed and accurately record their trades.

Off-Exchange Trade Reporting

Off-exchange trading can be quite challenging to regulate and report because it happens outside the exchanges. However, the ADF is critical in promoting transparency in such trading activities. Although no quoting broker-dealers are currently utilizing the ADF, there is potential for this to change. In fact, in 2020, JP Morgan used the ADF to report a block trade of more than 9800 natural gas contracts in the futures market. The Trade Reporting Facility (TRF) and the ADF operated by FINRA form the primary pieces of infrastructure for off-exchange reporting. As a result, off-exchange trades can be regulated and transparently reported to ensure a fair and competitive market.

Analyzing the Weight of ADF-Reported Trades

While the ADF may not be a frequently used tool, there is no denying the value it holds. Trades reported on this lesser-known platform might seem insignificant, but this is not always true. Analyzing ADF-reported trades could lead to fascinating insights and opportunities for rewarding analysis. Despite its infrequent usage and niche concerns, it is essential to ensure transparency and fairness in off-exchange trading. The ADF was established in 2002 and still has a significant role today, even in the wake of Reg NMS’ establishment in 2005. Ultimately, dismissing the importance of these reports could mean missing out on some intriguing opportunities for analysis. To sum it up, the Alternative Display Facility plays a critical role in off-exchange trade reporting, even though its usage is sparse. It is the go-to facility for reporting off-exchange trades that did not fall under the Trade Reporting Facility’s jurisdiction since the introduction of Reg NMS. There is still a lot of potential for the ADF, and we might see an increase in its usage. If you’re interested in learning more, contact Uncommon Education Trading to sign up for our free trading Masterclass to help you navigate the complex world of finance. So, keep an eye on ADF-reported trades and stay informed with the latest market trends to make informed investment decisions. Happy trading!