What just happened with Cochlear is a classic case of 'buy the rumour, sell the fact'

Matthew Stockman-GettyImages

Cochlear stock is tanking in trade today down more than $11 per share for a loss of 12.32%. That performance is despite the fact thatCochlear this morning reported that it had hit record sales for the year and posted a 56% rise to $AU145.8 million in net profits.

The fundamental reason behind the selling, according to some reports, is that the market was disappointed that Cochlear had undershot market expectations that it would print a profit of $AU155.5 million.

But, if you ask a trader what’s going on they will probably give you one very simple explanation. It’s just another example of “buy the rumour, sell the fact”.

That’s where a stock, currency, commodity or other asset price moves ahead of a big event, news release or, as is the case with Cochlear, a profit announcement.

Yesterday, in the CMC Stock of the Day (which appears each morning in my 20 Seconds for Traders column) chief market strategist Michael McCarthy posed the question asking if traders are looking for a big bounce in profit then such a “result should push the shares higher, right?”

His answer? “Chart says no.”

Which is exactly what happened this morning. So we asked Michael why.

McCarthy told Business Insider:

The 20% rally from early July reflected expectation of a strong recovery in earnings on the back of a market share recovery. Some analysts forecast a return to the market dominance enjoyed by Cochlear before its 2011 (first) product recall, as well as currency benefits. It appears both were overestimated. The reported EPS of $2.56 fell short of the consensus estimate of $2.75, resulting in a share price disaster for a stock trading near its all-time highs.

In trader speak that’s a classic case of “buy the rumour, sell the fact”.

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