Apple, Intel and Post Earnings Announcement Drift

Earlier this evening, $INTC beat analyst estimates and traded higher by 4.5% while $AAPL missed estimates and traded lower by 6.5%. My expectation is that tomorrow’s close will be critical in determining the direction of these stocks over the next few months.

Here’s why.

Analysts estimates serve as a proxy for market expectations.

Stock prices tend not to respond in full instantaneously to new information such as earnings surprises but to drift instead, after an initial gap, in the same direction of the surprise for a few months.

The above chart, taken from a classic study by Bernard and Thomas, displays a phenomenon called post earnings announcement drift in which stocks tend to continue to move in the direction of the surprise for a few months after the earnings event.

The Y axis denotes the magnitude of the surprise based on standardized unexpected earnings.

I am taking into account tomorrow’s close because, through experience, I have found that the direction of the initial move after the surprise adds further validity to the direction of the subsequent drift.

In the case of $INTC, the beat was substantial and the initial reaction was positive while in the case of $AAPL, the miss was also substantial and the initial reaction was negative.

As such, and in light of the quantitatively derived tendency described above, I would expect $AAPL to continue to drift lower for 2 plus months and $INTC to drift higher over the same period if they the after hours price reactions are any indication of tomorrow’s close.