May 3, 2011 - One word: Surprises.

Stocks are dissected, scrutinized and analyzed by everyone from Wall Street analysts (who tend to be quite smart in spite of what some people say) to a first day stock buyer. Each has an interpretation of the public information, now more available than ever thanks to the Web. While Wall Street analysts have first crack on most newsworthy events, then publish it to their firms' clients, that news is quickly disseminated for all to read.

It's the same as saying that there is an efficient market. That today's price incoporates all the known information about a stock and until there is news, don't expect the stock to do very much.

Many times that news comes in the form of earnings. Most stocks are followed by Wall Street analysts unless they're very small and no business can be generated from them. The analysts make their best, educated guesses (called estimates) as to what the next few quarters' earnings will be and annual totals. They refine them as the quarter progresses, reflecting sales and profits as they can determine them. That estimate is what investors focus on. It's a single number. When the company reports the actual number, that's when the surprise element can occur, and that's when a stock can really move.

But the positive (or negative) surprise can come at any time. It can be a new, large contract, or the loss of one. It can be a new drug. It can be the failure of a promising cure. When surprises happen, a stock reacts. It's not figured into the current estimates. Those earnings' estimates have to be changed, reflecting the new information. How much depends on the enormity of the event. And then expect the stock to over react.

That's because investors don't like surprises, especially on the downside. They like consistency. That's why a stock that steadily improves earnings has a higher Price to Earnings ratio than one that has erratic earnings, delivering large positive surprises one quarter but missing estimates dramatically in another. While a stock will certainly jump on good news, it has a limited effect because all investors can easily sell into a rally and take money off the table, creating more supply for investors wanting to buy.

It's the bad surprises that really hit a stock. That's because all investors now can become sellers. And there isn't much interest in buying a stock with bad news. In fact, adding fuel to the downward spiral are short sellers who put more selling pressure on a stock. Bad news is almost always more detrimental to a stock's price than good news is for boosting it.

That's why investors need to be vigilant in their stock portfolio. Being aware of what's going on in a stock can save or make you a great deal of money. By monitoring your stocks, even just once or twice a day to look at news on it (supplied by all quote programs), investors can determine whether the news is brutally bad, warranting a sell, or positive enough to encourage more buying or at the very least, to leave alone.

Surprises can be good and bad. Knowing about them and reacting to them will help keep your portfolio in better shape than simply ignoring them and hoping for the best.

- Ted Allrich