Explanation for massive sell-off after market closes

[Martin 1]

Hi community!

 

There is something I would like to know....

 

We recognized today a huge sell-off of ROKU and AAOI after market closed. Why is this happening? Someone wrote in the chat because of bad earnings perhaps?! But I think that would not happen instantly, right? Who is dumping their shares and why after market closes?

 

Thanks!!

[Abiel 474]

For $ROKU, good results = profit taking ... Roku Beats December-Quarter Views, But Shares Fall Late

[Robert H 453]

Martin, prices move constantly as long as trading is allowed. This is especially true for earnings that happen after the bell. Numerous institutional and retail traders are either buying the rumour or selling the news, even during extended-hours.

 

Pre-market trading in stocks occurs from 4-9:30am EST, and after-hours trading on a day with a normal session takes place from 4-8pm EST

 

When a stock makes our Gappers Watchlist in the morning, it means that the price is +/- a certain percentage from yesterday's close. All of that movement occurred either during after-hours (prior day), or pre-market (current day).

 

As Abiel mentioned above, the market interpreted ROKU's earnings as bearish and this caused a huge sell-off following the release. Market participants drove the price down either via short selling or dumping of positions. Why wait until tomorrow to capitalize on the news? The early bird always gets the worm.

[Martin 1]

Alright, thanks!

 

That means at 4:00pm (and not earlier) a company makes an announcement and at 4:01pm the price changes dramatically, seen at ROKU. I assume the companies are not allowed to make such announcement at market hours? (because of market manipulation, etc.?)

[Robert H 453]

In the case of ROKU yesterday, the price moved instantly right at 4PM. I suspect some people were trying to front-run, while others had mechanisms in place to interpret the results with blistering speed. I've heard of language programs/algorithms that can parse text to infer whether the results were positive or negative.

 

ROKU closed at 51.10 yesterday. If you look at the price action from 4:00 to 4:10, the price ranged from 43.50 to 54. This is probably because they beat the earnings expectations but provided negative forward guidance. It took nearly 10 minutes for the market to agree that the report was going to have a negative effect on the share price.

 

Companies rarely release earnings during market hours. This is because such big news can disrupt trading and would most likely trip a circuit breaker halt. In fact, some stocks are halted midday when big news is pending, such as a merger or other corporate action. Releasing earnings in the after hours gives the market more time to digest the information and prevent wild swings (since there are less traders, less liquidity, etc.)

 

In a market where every second counts, there will always be participants trying to position themselves before the majority. That could take the form of betting blindly, using technology to acquire an advantage, or straight insider information. Here is an interesting article that investigates some sort of a leak after the Federal Reserve released news which moved the price of gold before it should have. There was a media black out in effect, so somebody managed to pass that lucrative information along.

[Martin 1]

Great Explanation. Thank you!