Share price response to news

[Shield11]

Hey guys,

For some of the investors who've witnessed plenty of obscene share price reactions to news I just wanted to get some thoughts.

Recently, a stock called FAR exploded in response to oil being found off the coast of Senegal. With news announcements that big, would you generally expect to see the share price respond then correct - or would you expect it to stabilise at it's new level?

My thoughts would be that in the example of FAR investors would flock to buy driving share price up, meanwhile many early investors would be selling. Then, after the honeymoon period of around a week and throughout the following months as the company sells the oil the share price shouldn't be doing anything outrageous other than grow at a standard rate as cash flow reports are released. Of course fundamental data eg assets/liabilities/equity will also play a role but assume the company's financials are stable.

My goal for asking this question is not to try and have people evaluate a penny dreadful for me (i have no intention of investing in this stock) but rather understand how the market responds to different types of acute news and then what it's reaction is after the news' honeymoon period.

 

[burglar]

... My thoughts would be that in the example of FAR investors would flock to buy driving share price up, meanwhile many early investors would be selling. Then, after the honeymoon period of around a week and throughout the following months as the company sells the oil the share price shouldn't be doing anything outrageous other than grow at a standard rate as cash flow reports are released. Of course fundamental data eg assets/liabilities/equity will also play a role but assume the company's financials are stable ...

Hi Shield11,
Welcome to ASF!

It's an "all depends" question.
I think you have it pretty right

If you'd like my opinion ...

Auction action is what drives share price.
It depends in part on news. (but not necessarily)
It depends in part on the direction of the market.
(spikes on "acute" news can go against a falling market, but are generally muted)

Yes, the price re-rates a day or two after a spike.
Then drifts away slowly as disinterest sets in.



This may help ?? or not?
Best post I have seen on AUCTION ACTION:

https://www.aussiestockforums.com/forums/showthread.php?t=27685&p=802890#post802890

 

[burglar]

Try this link:

https://www.aussiestockforums.com/f...t=27685&page=2&p=802890&viewfull=1#post802890

 

[Shield11]

Thanks Burglar,

Dis-interest is the interesting part here. Theoretically without the introduction of any news there should be no movement. Therefore as the company goes about it's day to day operations we should expect to see a correction in any recent surges.

This is the kind of knowledge that comes about through historical observation. In order to read up on this further I'm not quite sure what to search. Is "auction action" the label applied to the study of the response of share price to news or is there another term i should be searching?

Thanks again!

 

[So_Cynical]

There's news and then there's news...AMM up 12 to 14% today on some small, totally new to market merger news.

http://www.asx.com.au/asxpdf/20141027/pdf/42t666zfnp0vqh.pdf

If something comes of it (the news) then the SP my be sustained at the new level, if not then it may fall back down, if VOC doesn't sell down after merger talks fail then some of the rise maybe be sustained....lots and lots of if's and bu'st in all news for all stocks.

Hell sustained no news can be news.

 

[skc]

Share price response to news = nature of news minus what is priced in / expected.

A 10% increase in profit is not good news if the market is expecting 20%.

Then there are all the other stuff around short term supply and demand which creates temporary distortions.

There's no simple catch-all approach or answers.

 

[Shield11]

Thanks So_Cynical and skc,

"Hell sustained no news can be news."
Very good point. AVQ for example seems to have been living on this for a while awaiting lawsuit results etc.

These are exactly the thought provoking answers I was hoping for, thanks again guys.

 

[DeepState]

The presence of market participants that purchase and sell for reasons other than fundamentals related directly to the stocks is very pertinent to the situation you describe. Fundamentals cannot explain even half of the movement in share prices over time (actually much less). Investment is only partly about fundamentals in moderate to shorter timeframes where most participants essentially reside.

The classic on the matter is below. Come back if you need a translation, but hopefully the key points in the overview are clear enough...and sufficient to get the point/introduction. It is just a concept, but the basic idea is real. Issued in October 1987, no less, just to make the point.

http://www.nber.org/papers/w2395