Earnings Season - The 800-Pound Gorilla
Every three months publicly owned companies release earnings reports. This gigantic flood of earnings announcements has become the equivalent of a massive "Balance Sheet Open House." Investors, stock analysts, and traders around the globe routinely check earnings calendars for the latest updates on the successes and failures of corporate earnings strategies.
Accounting ledgers are scrutinized. CEOs are interrogated. The media puts their spin on the news. Thousands of companies file earnings reports, all within a few weeks of each other. Stocks fly up and down the charts as each new earnings report is announced. Yes, earnings season can certainly be a roller- coaster ride for investors and traders!
Earnings Reports - Wild Price Swings = Opportunity
Due to this constant release of earnings reports, stocks have a much greater likelihood of rapid -- and often destructive -- price swings. Market reactions create incredible volatility. Even companies who haven't yet released earnings reports are vulnerable to the frenzied price action.
Analysts and traders scramble to interpret how one company's earnings report may lend insight into another. Investor reactions often make no apparent sense whatsoever. Many scream of outright contradiction as "bad" news propels a stock higher, yet "good" news sends a stock plummeting. Earnings Season is often frustrating -- even for Wall Street regulars.
Fortunately a few guidelines let investors and traders avoid earnings season confusion and make money trading stocks during the quarterly explosion of Earnings Reports.
Rule #1 - Things Aren't Always As They Seem
To understand the dynamics of Earnings Season, it's important to realize that there isn't necessarily a strong relationship between a company's profits - or losses - and that same company's stock performance. For example, just because an earnings report shows a profit does not automatically mean the company's stock price will go up.
Other influential factors are more important during Earnings Season. Price momentum, support and resistance areas on stock charts, earnings performance versus analyst expectations, and performance comparisons to industry competitors are the factors that usually produce exaggerated impacts on price in the short term.
Why? Because short-term traders make money from the volatility created by the earnings reports, not necessarily by the fundamental strength of the earnings themselves. Profit potential for investors and traders correlates directly to fluctuations in share price. Those fluctuations evolve out of what can perhaps best be described as "uncertainty."
Rule #2 - Wall Street Despises Surprises
The old saying that "Wall Street hates uncertainty" is especially true during Earnings Season. For example, Lets say ten out of ten analysts expect losses in earnings and revenue for a certain company. When the company's earnings report matches those expectations, the market response is usually "no big deal."
The stock doesn't drop because investors were expecting the earnings report to reflect analyst's predictions. When the earnings report matches expectations, no one is surprised. No surprises means the stock market tends to rest easier.
Okay, are you ready to covert all of this earnings education into cash?
How To Make Money With The Earnings Calendar
There is another an old saying that wise investors "buy the rumor and sell the news." The "buy" part of this notion is often applied to rumors about new products or company takeovers. It can also be applied very profitably to rumors that a company will report earnings higher than expected. This is one surprise that Wall Street loves!
The idea is to buy the stock early when the "good news" rumor is beginning to spread. Then you sell the stock immediately once the rumor becomes a fact. When applied to better-than-expected earnings reports, this strategy is often called "The Pre Earnings Run Strategy." Here's how it works:
The Earnings Run Strategy
- Locate a company that has a good track record of releasing positive earnings report surprises. Make sure that the firm is expected to beat analyst's
earnings estimates in their next quarterly earnings report. You can find plenty of good candidates in
The RightLine Report .
- Check the
RightLine Earnings Calendar
to see when the company is scheduled to release their earnings report.
- Two to three weeks prior to the earnings calendar date, check the stock's chart to see if the stock is trending higher or bouncing from a recent dip in
price. If it is, use the RightLine
Risk Control Calculator,
to determine the optimum number of shares to purchase.
- Buy that exact number of shares, then wait as prices rise due to the anticipated positive earnings report. Check the price action daily. Sell most or all of the shares for a profit to the group of incoming buyers just prior to the earnings announcement.
- If you sell most but not all of your shares, wait for the expected "good" news announcement that occurs on the earnings calendar date. Then sell the rest of the stock on the final surge in prices caused by investors and rookie traders buying the "good" news in the earnings report. This surge usually takes place just after the earnings report is released.
Step number five can be a bit risky. Traders sometimes sell their shares just prior to the earnings report announcement, which can cause the price to drop the session before the earnings calendar announcement date. Because of this risk you may want to sell ALL of your shares just before the earnings calendar date.
On the plus side, the payoff for holding on to a few shares can be very profitable. On the downside the price may drop sharply immediately after the earnings report is released regardless of how good the earnings are. If earnings are poor, the "sell the news" concept is magnified due to the large number of disappointed investors. The only way to win is if earnings report outrageously exceeds estimates, and is far better than anyone expected.Stocks trade on anticipation and expectation. If a good earnings report is anticipated and expectations are merely met, professional traders will usually take profits immediately.
There are no regulations or laws that require companies to release earnings reports on their published earnings calendar date. Public companies can and often do change the earnings calendar release date without notice. This is especially true in the week prior to the published earnings report date.
Whenever you are in an Earnings Run Strategy stock position, regularly check the earnings calendar to make sure the earnings release date hasn't changed. You can confirm the RightLine Earnings Calendar date by going to the NYSE or NASDAQ Earnings Calendars. If the earnings release date has changed, then double check the Risk Management portion of your plan to make sure you lock in profits and avoid damaging losses.
Holding a large position past the earnings calendar date can expose a trader or investor to undue risk. Always be aware of the scheduled Earnings Calendar date for any stocks you own, and take profits early.
You can use this Earnings Calendar tactic to make money every quarter. Start looking for these opportunities in early April, July, October and January. There is no official end to each quarterly earnings season, but it is considered to be over when most major companies have released their earnings reports for the quarter. This generally occurs approximately seven weeks after the season begins.
Good luck with your profits!