What moves markets

After this lesson you'll know why good news can make a stock fall, and which forces move everything at once.

The expectations game

A company reports quarterly profits up 20%, and the stock drops 8% at the open. New traders find this maddening, so it's worth working through slowly, because the explanation turns up again in almost every later school.

Price, at any moment, already contains what the market's participants collectively expect to happen. If the consensus expected profits up 25%, then 20% arriving is bad news relative to what was priced, and price adjusts down to the new information. What moves price is the surprise, meaning the gap between what happened and what was expected. Profits up 20% can be a decent quarter for the company and a disappointment to a share price that had 25% baked into it. Once you can hold both of those at the same time, a lot of confusing days stop being confusing.

The same logic explains why trading headlines is so hard. By the time you have read one, the fast money from course 3 has already repriced the surprise, and that took seconds. What's left for slower participants plays out over days and weeks, in how price and volume behave after the news. That's School IV's territory, and it's where this Academy eventually earns its keep.

The tides

Company news moves one stock at a time. There are also two forces big enough to move every stock together.

Interest rates — the price of money. When safe government paper pays 5%, every risky stock has to compete against that 5% for capital. When it pays 0.5%, the competition is feeble and valuations stretch. School IX walks through the mechanism properly. Roughly, rates work like gravity on asset prices, and everything gets weighed again when they move.

Liquidity and positioning — how much money is out hunting for risk at all, and how crowded each side of the boat has become. Markets sometimes fall hard on no news whatsoever, because too many participants were positioned the same way and one big one needed cash. Fear and greed reach prices through this channel.

One calendar note ties this course to School II: four times a year, most companies report earnings within the same few weeks. Single-stock surprise risk arrives in seasons, and the dates are published well in advance.

Check yourself

1. A company beats its forecast and the stock falls. Explain in one sentence. (The market had priced in even more, so the surprise was negative.)
2. Why is a headline usually worthless to you by the time you read it? (The surprise was repriced within seconds; the information that remains is in how price behaves over the following days and weeks.)
3. Name the two market-wide tides. (Rates and liquidity/positioning. Rates are the price of money, and liquidity/positioning covers how much money is seeking risk and how crowded the trades are.)

The idea this lesson installs

Price moves on the gap between what happened and what was expected.

Next: Course 9 — "What a trade costs."