It's Not A Coincidence: Rumors During Quiet Periods

As the dust settles down on another lackluster quarterly results from social networking site Twitter Inc TWTR, the shares are recoiling from a pre-earnings run up.

Twitter's Pre-Earnings Volatility

After closing out 2016, a year when Twitter shares underperformed the broader market, at $16.30, the stock broke above $17 on January 5 only to violate this level to the downside on January 19. The stock ended January at $17.62, a gain of 8.1 percent for the month. On February 7, two days sessions ahead of the earnings release, the stock successfully challenged the $18 barrier.

Who Moved My Twitter Shares?

What caused the volatility in the shares of the company ahead of the earnings? Did the market discount an inflection point in the company's user statistics? Going by sell-side opinions, expectations for the quarter were muted. But for a Trump bump, given the president's copious use of the platform to air his views, analysts were largely resigned to the fact that Twitter redemption is a long shot.

A possible explanation could be rumor mongers' mischief, with the impact accentuated by the leeway provided by the "Quiet Period," which allows floating rumors unbridled, with no chance of them being quelled by the parties concerned.

What Is A Quiet Period?

Apart from the quiet period related to IPO offerings, companies observe a quiet period between the time immediately preceding/following the end of the quarter and ahead of its earnings release. The company limits its interaction with investors and analysts during this period just so that it refrains from divulging any information that could unduly influence its stock price.

During the quiet period, the company is privy to the quarterly numbers, although these have not yet been publicly communicated. The quiet period associated with earnings release does not have a standard length and therefore is fixed at the discretion of the company.

How Quiet Periods Play Into The Hands Of Stock Pumpers

Since the company refrains from making any comments on market sensitive information about itself, stock pumpers have an unhindered run during this time to sway the stock in the direction they want to.

A case in point is Twitter's move, defying the logic, ahead of its fourth quarter results. On February 3, a Tweet from the Twitter handle @CalConfidence said Walt Disney Co DIS is working with a consortium to make a $27 per share all cash offer for Twitter.

Making sense of the spike in Twitter shares on February 7, Charles Gasparino of Fox Business Network tweeted the rally was not due to M&A rumors but due to the company introducing anti-troll rules, which clear the way for a potential takeover in the future.

In a blog post, Twitter announced on February 7 that it is making three new changes to make it a safer place. This included stopping the creation of new abusive accounts, introducing safe search results and collapsing potentially abusive or low quality content.

Stock pumpers, thus, have field days during the quiet period, when companies can do little to refute the unfounded rumors that can be very damaging for the stock. Buyers beware!