How to trade in Earnings Season

Most tech companies are located on the west coast.  Usually they report earnings after the market closes.  The majority of financial companies are located on the east coast, and report earnings before the market opens, or during trading days. Therefore, the pre-market and after-market are closely watched during earnings season.

Each year, the majority of companies report quarterly earnings in January, April, July, and October. January reports the earnings from the fourth quarter of the previous year.  Usually 60% of sales and economic activity occurs in the last three month period of a year.  Generally speaking, the January earnings tend to be positive.  October reports the earnings for summer, and usually this data looks sluggish.  Plus Quantitative Easing (QE) has often ended by summer. Thus October could be the worst month in a year.  Especially in a liquid-induced market, the Fed plays an important role.

Usually, earnings guidance is more crucial than the announced earnings themselves.  Earnings only represent past performance.  Future guidance, however, shows the direction and growth of a company.  Investors had better wait until after the company conference call, which will tell you the company’s future growth direction.

Markets tend to be more active and volatile in the week of Options Expiration (OE).  The earnings of the tech bellwether Google usually falls on Thursday, one day before the options expiration date of that month.  Its earnings may intensify the movement of the market.  

People often complain about the difficulty of trading based on earnings.  Here is an example of a headline on 1/11/2013 from Yahoo Financial.  The headline said, “Wells Fargo Profit Jumps 24% in Fourth Quarter, Driven by Mortgages”.  However, at the close here is the summary of stock performance on that day: “Wells Fargo (WFC 34.76, -0.64) is down 1.9% after reporting its fourth quarter results”.  This is very confusing to traders.

This situation happens all the time.  When you read a headline like this, you might think the corporate earnings were fantastic.  However, if you wanted to trade ETFs or stocks based on the news, you might lose money.  Usually the earnings report will be based on the earnings “whisper numbers” in market makers’ minds, instead of what the public sees.

Traders can find whisper numbers for quarterly earnings from the following link:

         http://www.earningswhispers.com/?advert=g4cal&gclid=CLbdvNibyLgCFWYV7AodJAsAWQ

Here is another headline that caused chaos and misunderstanding on 7/26/2013. Since the link is extremely long, Google URL Shortener was used to obtain the following link as:

          http://goo.gl/JF6zLD

The headline states, “Amazon Earnings Disappoint, Shares Move Higher”.  This is another example that illustrates challenges investors face when they trade in the earnings season.  Some analysts suggest that average investors should not bet on earnings.  Probably we should follow this advice.

        Credited to Yahoo Finance.