At times you wonder why the stock is falling despite very good fundamentals. There are many reasons why short-term stock price diverges from long term fundamentals.
At times you wonder why the stock is falling despite very good fundamentals. There are many reasons why short-term stock price diverges from long term fundamentals. Though the major reason for the price-fundamental mismatch is the expectation but there are few other reasons why a stock prices move lower even on good news. Let’s see them.
1. Market Sentiments
If market sentiments are not bullish, it can overlook stock-specific factors like good earnings or good fundamentals. Apart from the market direction sector specific sentiments can also impact the stock prices.
2. Profit Booking
Large investors target good results outcome to unwind their large position. Large investor holds substantial number of shares and if they plan to sell them on any given day the stock price can come down sharply and so on good news or good result outcome, large investors can unwind their long position easily without much of a price damage.
3. Interest Rates
A rise in interest rate can potentially lower stock prices – even if fundamentals of a particular stock are excellent. As an investor you may not be ready to take the risk of investing in stock when you can get good appreciation of your money elsewhere without any risk. The only reason I can think for Indian market under-performance. We see lot of money being gushed out of Indian equity market but the Re-USD price is not impacted to the extent it should. The only reason I can sense for it is – large investors and foreign investors think putting the money in risk free debt market is much more beneficial than remain invested in equity market because of less upside potential from the current levels.
4. Mode of Earnings
Producing winning numbers may not be enough. Occasionally company can report a one-time gain because of unexpected factors like – a lower than average tax rate or income from forex changes… Investors not only value number but mode of earnings as well.
5. Future Prospects
Even if results being reported may be very strong, outlook regarding future earnings may not be as strong and this can dampen the stock prices heavily.
Most of the above discussed factor’s reverses to explain price rise on an outcome of weaker than anticipated results.
Share your views in comments below.