Stock Market Events That Decrease Investors Confidence

Sometimes earnings history and earnings projections are the only solid data on which you can base your decision about the stock. That may be enough, but you must constantly monitor your stocks for events that can change either market perception or investors confidence, because these two factors go hand in hand. If one stubs its toe, the other one stumbles.

Let’s look at some events that can change the perception of a stock’s future earnings and the confidence level about those earnings. The different strategies you may use in implementing a given investment style will closely follow theses factors. The following 10 events are listed in order of those that have the most impact on market perception and/or investor confidence.

Earnings Announcements

A company’s quarterly earnings are the number one factor in charging market perception and investor confidence – although the direction of the change may not always be what you’d expect. We’ve already talked about what can happen when a company misses its projections by a mere penny, but how many times have you heard a company announce record earnings and watched its stock go down instead of up? This counter-intuitive movement is once again owing to market perception of the company’s future earnings. The just-announced earnings might be record setting, but the market apparently expected an even bigger number, one based on “whisper numbers”. Consequently, what looks like positive stock market news is perceived as negative, and the stock sells off, to the amazement of novice investors. A company’s failure to meet its whisper numbers is often viewed as an early warning that future earnings and the attendant growth rate may not be met.

The nest of the earnings announcement itself may trigger a negative change in perception or confidence. The announcement may include an overt negative statement, such as a warning that future quarters will challenge the company. Sometimes it is the mere omission of positive statements forms the company that will cause a stock to sell off. As you will see later in our discussion of investing styles, there is a danger in buying the stocks of companies that have very high expectations and whose price is based on extraordinary earnings projections far in the future. Even a mirror change in the market’s perception or in investors’ confidence level might cause dramatic changes in the price of such a stock.

The good news is, if a company announces earnings that meet or exceed the market’s expectations – and especially, if it has a history of doing so – the perception of a rosy (or rosier) future and investors confidence that it can be achieved can propel a stock to new heights.

Revising Estimates

It has been proven in a number of publications that one of the most accurate predictors of positive or negative moves in stock price is the one-month change in analysts’ estimates. The first research report written by analyst is usually positive. Frequently, the analyst is doing his duty to his firm and looking for good things to say. A revision of those estimates, however, is very meaningful because it takes a separate initiative by the analyst to say, “I’ve changed my mind”. Or “I was wrong”. For example, if an analyst says, “ Last month I was saying the company will make $1.00m and now I think it will make $1.10”, that is a very positive act for two reason. First, the analyst has taken the initiative to raise the estimates, and, second the announcement generally reflects some new event or improvement in the industry or in the company. It is not surprising then that an upward revision in earnings estimates should result in a positive change in the price of a stock.

A downward revision in an analyst’s guesses has a far more dramatic effect on the share price than does an upward revision ; actually it can be downright terrible.

It takes a good deal of bravery for a researcher to lower an appraisal, because in numerous cases he is asserting something negative about a customer of the firm. Once more, the quantity of researchers who makes a revision is important. A few researcher raising or lowering an appraisal will have much more result on the stock than merely one researcher supplying a revision.

Company Alerts

When the company itself warns speculators that it will not meet its next income projections, look out. In 2001 it became very common for corporations to give out cautions that things wouldn’t go as well in the future as anticipated. This is among the reasons we found ourselves knuckle-deep in a bear stock market by quarter three.

Each takings season that year, company after company stepped up to the plate to lower expectancies about its future performance. This sort of pronouncement causes such a penalty to the company’s share price you can be fairly confident that when a company makes such a statement, it is talking the actual facts. Company disclosures are one of the very best methods of understanding what is probably going to happen to future revenues. There are exceptions, however. Some firms ,eg Microsoft, have been known to sandbag researcher, influencing them to make projections that were lower than what the company knew it may achieve. As a result, the company could meet or beat the Street regularly. In general, though , when a company announces it isn’t about to do as well as predicted, you must believe them.

IR Changes

The lowering of rates has 2 potential impacts on stocks, both often believed to be positive. The existing generally held belief is that lower IRs give consumers additional money to spend, which interprets into higher profits for enterprises, which makes firms more prepared to spend money on inventory, research, new releases, and enlargement all of which help the economy. Higher profits are predicted to cause increased revenues, so financiers become more assured about the future revenues potential of companies generally. In this fashion, lower IRs cause positive ripples across the economy.

That’s the reason why the Federal Reserve decreased rates through 2001, hoping to halt the country’s slide into recession. The 2nd positive impact of lowering IRs has nothing to do with market perception of future takings or financier confidence. Lower rates just make stockholders less certain to buy debt instruments and likelier to buy equities, so driving up stock costs generally. A rise in interest rates has precisely the reverse effect. Raised rates stop consumer expenditure, squeeze business profits, act as a restraint on company spending, all of which represent a negative impulse on the economy. And higher rates pull cash out of the equity markets and direct it toward debt instruments. There are, naturally, companies and business sectors that benefit from increased rates , for example the banking industry, and these corporations and sectors may react quite differently to IR changes. Insider dealing : they have to know Something we do not If company insiders take their gainfully acquired money and buy stock in the markets, that’s a rather good sign that they suspect their company’s future earnings will be better than the market expects.

At minimum, it signifies that they feel the firm’s share price is too low at that time. Of course, who knows more about company’s prospect than the top operatives of that company? Naturally, insiders aren’t always right.

Often the future doesn’t turn out how they predicted. Regardless of whether it is doing, the market occasionally never achieves the confidence level of the insiders, and therefore the share price may languish. However , insider purchasing is among the 2 best predictors of future positive stock movement.

From the other viewpoint, insider selling, while not a great sign, isn’t always as unpleasant as it may appear. Many corporations base executive compensation programs on stock, which leaves insiders with no practical method to purchase new houses or send youngsters to university aside from by selling stock. Similarly , insiders regularly have only a few weeks each quarter in which they can execute such sales. There aren’t any hard-and-fast rules, but most public companies often permit their insiders to trade company stock just from the point that last quarter’s revenues are public and next quarter’s takings are yet unknown even to insiders. The point is to stop insiders for trading on info that hasn’t been distributed to the general public. However , insider selling does not suggest confidence in a company’s future and if insiders are selling in big quantities, that sends an especially poor signal indeed.

Insider Trading

If company insiders take their precious ( some could argue not-so-hard-earned ) cash and buy stock in the market, that could be a very good sign that they think their company’s future revenues will be better than the market expects. At minimum, it signals that they feel the corporation’s share price is too low at that point. In fact, who knows more about company’s prospect than the top middle management of that company? Naturally, insiders aren’t always right. Often the future doesn’t turn out how they predicted.

Whether or not it is doing, the market occasionally never reaches the confidence level of the insiders, and that the share price may languish. Nonetheless , insider purchasing is among the 2 best predictors of future positive stock movement. From another standpoint, insider selling, while not a good indication, isn’t invariably as nasty as it may appear. Many corporations base executive compensation programs on stock, which leaves insiders with no effective method to purchase new houses or send children to varsity apart from by selling stock. Additionally , insiders frequently have a few weeks each quarter in which they can execute such sales. There aren’t any hard-and-fast rules, but most public firms typically permit their insiders to trade company stock just from the point that last quarter’s takings are public and next quarter’s revenues are yet unknown even to insiders.

The point is to stop insiders for trading on info that hasn’t been distributed to the general public. Nonetheless , insider selling doesn’t suggest confidence in a company’s future and if insiders are selling in big amounts, that sends a particularly poor signal indeed.