Why Stocks are Up When Earnings are Down

AAPL EARNINGS

Above you can see the horrendous AAPL earnings numbers. The company sold almost 3 million less phones than expected. They sold 510,000 iPads less than expected. They sold 420,000 less Mac Computers than expected.

The stock was also downgraded 2 days ago. The company is also under investigation by the Department of Justice for slowing their phones down in an attempt to force people into needing to spend another $1,000 for a new phone.

STUPIDITY

My new company is going to be a window repair company. I am tying my business cards to a rock, and then throwing that rock through windows like Earnest T. Bass. It is genius. It is essentially what AAPL was doing, so it must be legal. Oh...and one more thing. Tim Cook has NOT brought one new product to market. His next new product will likely be the iPhone 11, that has a 1/16 of an inch wider window.  More genius.

EARNINGS EXPECTATIONS

It is no wonder people were expecting bad earnings. This is perhaps a major reason why the stock fell from $180 to yesterday's close of $167.78.   The next logical question people will have is, “Then why is the stock looking $5 higher in the “after-market close?”

ANSWER

If everyone is expecting bad earnings and the stock to subsequently fall, who would stay in the stock until it fell?  People who felt the stock was going to fall after earnings would obviously want to sell the stock before they lose/give back more money. They will sell it out the moment they think the stock is going to fall. Now...if everyone who is afraid of the stock falling sells out before the event, who is left to sell (and force the stock down more) when the bad news does come to fruition?   The obvious answer is—“no one”.

AFTER BAD EARNINGS BOUNCE

Now let's say that you guessed right that the earnings would be horrendous, so you placed a bearish position that makes money when the stock decline. When earnings come out and no one is selling as they are out of their stock already (and maybe wanting to buy it back again, but cheaper), the stock will just sit still. Knowing you are not making any money on your short position (and may lose), you will want to close the trade, which means you will be buying stock or an equivalent.   This will start putting buying upward pressure on the stock, and nudge the stock a little higher. As other people with a short position find themselves in the same predicament as you, it becomes a competition to buy shares, deltas, etc. With enough people in the same situation as you are around, the stock goes higher, not lower.

AAPL GRAPH

Below is a graph of AAPL after the earnings came out. The company reported earnings 30 minutes past the close and that is shown in the gray area of the chart below.

LESSON
Below you see that once earnings was announced and actually shown to be horrific, the stock had a fast $5 drop with no real trading volume occurring. Had selling been heavy the stock would have likely stayed down, or fallen even more. With the lack of selling, anyone short the stock had to be concerned about when and where they could buy back their short position. They were hoping for a larger free-fall and were not getting it.

CLOSING

I hope this helps the people confused as to why a stock can go up after AWFUL earnings. We get a lot of questions along these lines, and this was a great example on that specific question. Have a great day.