Day 126 The market confidence

The market confidence

During our study on the stock market, it is interesting that we may find the company’s share price will not directly reflect its performance. On the contrary, it is what the market believes will affect the value of the stock. Therefore, if we want to accurately evaluate the pattern of the price, we must comprehend the real impact of information over investors.

Generally, we need to allocate the weight to individual information, in order to

perform reasonable assessment of the possible influence. For instance, the Petro China Company Ltd. and Sinopec, the China Petroleum and Chemical Corporation’s share price sharply increased 10% day. The reason behind this is simply as there was a rumor about the consolidation of these two leading monopolies. In fact, the Petro China first quarter report just indicated the net profit has decreased by 82% comparing to the same period last year. Which is definitely a negative figure over the company’s share price. So why did the market react to an untrustworthy rumor with such excitement, that even made the investor to ignore the poor performance of the company? To understand the market’s abnormal behavior, we should recognize the consolidation miracle brought by China south and north train. Through the impressive capital gain derived by the merger of the Chinese biggest railway companies, the investors believed that the reconstruction and consolidation of government-owned corporations would bring huge benefit. As a consequence, the market reacts drastically even with assumptions. The substantial investor’s confidence is sufficient to cover any negative effect from the company’s performance. The hypothesis was also proved by the consistent 10% increase on China Unicom’s share, after the rumor of its reconstruction.

If the market has great confidence that the stock is performing well, then it will actually make the stock to perform well. What’s important is the investor’s beliefs, rather than actual data.