Why A2 Milk share price dropped despite positive results

Have you ever wondered why the price of a stock falls when a company reports positive results? It's a perfect time to discuss this peculiar phenomenon, given we have reached the middle of reporting season.

Let's take the case of A2 Milk. In August last year, the company reported positive FY23 results with a 10.1% increase in revenue.

While this is good news, the stock dropped 13% on the same day and only recovered five months later in January 2024. This situation is not unique and happens routinely throughout every reporting period, leaving many investors confused.

This disparity lies solely in how the market interprets this information.

You have to remember millions of opinions are floating around, so while some news may appear positive to one investor, it may be negative for another. To tackle this conundrum, we have to make a few assumptions.

The first is that the market is not efficient, and the price of a stock will not always reflect the company's fundamental value.

This means that the stock price is often a reflection of anticipation and speculation of future results.

So, what can we do if we can't accurately assess a company's stock price based on what it reports? You need to rely on the price of a stock as it appears in the charts, as this is the only transparent piece of unadulterated information available.

This allows a skilled technical analyst to decide when is the best time to buy or sell a stock.

To give you another example, if you looked at the chart of A2 Milk before August 2023, the stock had been falling for 8 months with no opportunity to enter.

Given this, I would not have bought the stock regardless of what they reported in August.

Looking ahead, A2 Milk is due to report interim results next week.

Now, I don't have a crystal ball, but given the share price is up over 30% from its November 2023 lows, I am expecting some good news to come out of this report, which could present a potential buying opportunity.

However, don't be surprised if the share price falls on the release of positive news, as some investors may have expected better results.

When deciding whether to buy or sell a stock, I encourage you to look at the price chart, as it provides the best picture of whether the stock is likely to go up or down and whether to buy or sell, which is even more critical during reporting season.

What were the best and worst-performing sectors this week?

The best-performing sectors include Information Technology, up more than 5%, followed by Consumer Discretionary, up more than 3% and Real Estate, up more than 2%.

The worst-performing sectors include Health Care, down more than 4%, followed by Energy, down more than 3% and Materials, down more than 2%.

The best-performing stocks in the ASX top 100 include Altium, up more than 28%, followed by Downer Edi, up more than 16% and AMP, up more than 14%.

The worst-performing stocks include Seek and CSL, as they are both down more than 7%, followed by S32, down more than 6%.

What's next for the Australian stock market?

This week, the All-Ordinaries index has fallen under 1% to continue the downtrend of the previous week.

While a two-week fall on the Australian market may raise some concerns, it depends on how you look at it.  The current move down from the February high of 7934.90 points equates to a fall of around half of the prior rise from the 7551-point low in mid-January to the February high.

You may be wondering why this is important. The rise up to the February high occurred over two weeks, so now the buyers and sellers have had two weeks to state their case as to whether the market is bullish or bearish.

Given that the sellers have only pushed the market down in the last two weeks, half the price of what the buyers gained in the prior two weeks means the sellers are not as strong, which is a bullish sign.

As such, I now anticipate a reversal and for price to trade up in the next week, especially if we see a high close today.

What I like to do when the All-Ordinaries index is falling is to take that time to analyse every sector to see whether there are any outperformers relative to the index.

Performing this kind of analysis gives me great insights into where the smart money is going, allowing me to easily identify stocks to add to my watch list.

Information Technology is the best performer this week, so I encourage you to look at this sector, as these stocks will likely benefit the most when the bulls re-enter the market.

If the market turns to rise next week, as I anticipate, I believe it will challenge and possibly break the all-time high. However, it could find support around 7,500 points if it continues to fall away.

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