Top 5 reason why stock market slide

[K.Karthik Raja]

Top 5 reason why stock market slide
1. Major Shareholder Selling
Some institutional shareholders set a target to sell their stock at a
given price or if a certain event transpires. The end result is that
the supply of shares available for sale (after the event transpires)
usually depresses the share price.
How can the average investor tell if a major shareholder is unloading
his or her position? The answer can be found in the individual trade
volumes on the tape.
For example, while individual investors typically make trades in the
hundreds or low thousands of shares, institutions such as mutual
funds
often sell stocks in the tens of thousands of shares - or, even in
rapid fire in low volumes of 3,000 or 4,000 shares.
So take a look at the tape and try to determine whether institutional
selling is indeed driving down the share price. Once the selling is
over, assuming the company's fundamentals remain intact, the stock
price often jumps back up again fairly quickly. This creates a great
buying opportunity for the long-term investor. (For more insight,
read
Institutional Investors And Fundamentals: What's The Link?)
2. Research Notes
Sometimes a sell-side analyst will put out a (negative) research note
on the company either just before or just after earnings are
released.
This report (even if it is only slightly negative in nature) can
affect the way that firm's clients think, especially those that are
more short-term oriented. In any case, as a result of the analyst's
commentary, some selling pressure often ensues. (Read more on this
subject in Trading On News Releases and What Is The Impact Of
Research
On Stock Prices?)
While individual investors may have trouble accessing these reports,
large newswires will often announce that a brokerage firm report has
been issued, or the firm itself may release some information about
the
existence of the report to the general public. Again, the savvy
investor may be able to use this information as a buying opportunity
once the selling pressure subsides, assuming that there have been no
fundamental changes in company.
3. Not Meeting the Whisper
Oftentimes, a company will beat the average Wall Street estimate, but
fail to meet or beat the whisper number and, as a result, its stock
price falls. The whisper number is simply an unofficial estimate, or
rumor, that is circulating around Wall Street. Besides being aware of
what that number is, there really isn't much an investor can do to
defend against this. However, it does serve to explain some sell
offs.
(To learn more, read Whisper Numbers: Should You Listen?)
4. Faulty Numbers
Sometimes, there is a fundamental reason for a stock to fall after
earnings are announced. For example, perhaps the company's gross
margins have fallen dramatically from last quarter, or maybe its cash
position has dwindled dramatically. The company may also be spending
too much money on selling, general and administrative expenses (SGA)
to pay for a new product launch.
Investors should carefully review earnings announcements to try to
determine not only if the company beat earnings estimates, but also
how it beat them. Determining the company's financial standing is of
the utmost importance, as any shortcomings are bound to be reflected
in the share price sooner or later.
Look specifically for any (sequential and/or year-over-year) changes
in gross margins and operating margins. Also look for both sequential
and year-over-year declines in cash balances. And don't forget to
look
for large one-time additions or subtractions from net income that
could impact the way investors think. In the end, try to review what
the analyst community and the media is saying immediately after the
earnings are released, as their analysis of the situation may
actually
highlight an area of concern that you have overlooked. (For further
reading, check out Earnings: Quality Means Everything.)
5. Future Guidance
Most public companies conduct a conference call after earnings are
released. In this call, management may make forecasts or provide
other
guidance about the future prospects for the company. Investors need
to
remember that any guidance that is contradictory to what the
investment community is expecting can have a material impact on the
price of the stock. (Learn more about these meetings in Conference
Call Basics.)
Investors should try to take part in the conference call or at least
listen to the replay tape, which is often made available on the
company's website an hour or two after the original call takes place.
Bottom Line
There is almost always a tangible reason behind the downward movement
in a given share price after earnings are released, but it's up to
the
investor to play the role of detective and to try to determine what
that reason is. Those who are able to decipher the logic behind (and
the source of) such market movements may be richly rewarded.