Stocks in play are stocks with fresh news after the close or before market open. Fresh news leads to fresh moves.
Everyday hundreds of stocks release news before and after hours. These news releases can lead to stock making big move for the day.
When news is released either it is already discounted by the market or the market is surprised by it. The stocks can either go up or go down.
A heavily shorted stock on good news can lead to short squeeze. A heavily favorite of fund stock similarly on surprisingly bad news can tumble.
Announcement related to earnings in either as guidance or actual earnings have potential for starting or ending multi month moves.
This phenomenon is called PEAD or Post Earnings Announcement drift. It is considered a market anomaly.
In a perfectly efficient market a news should get discounted immediately and there would be no way to profit from it.
So let us say a stock releases significantly better earnings. If such earnings is going to lead to doubling of the stock, then at open it should gap up to the double price and there would be no way to profit from the new information.
But markets are not efficient. What happens is the new surprise gets priced in over time. This is what the PEAD phenomenon is about.
When companies announce earnings, if the earnings are significantly better or worse than market/analyst expectations then the company stock goes up or goes down for next couple of months.
Post Earnings Announcement Drift or Pead is 40 year old discovery.
Ball and Brown in 1968 first documented the PEAD anomaly in their ground breaking study that challenged efficient market hypothesis.
What does the study show. it shows that if you form 10 portfolios of stocks ranked by their earnings surprize then the portfolio of stocks that are in top 10% by earnings surprise outperforms the 9 other portfolio and similarly the bottom decile portfolio under performs the nine other deciles.
This is the most researched topic in financial field. Every year at least 50 new papers are published on PEAD and is persistence.
Stocks react vigorously to earnings acceleration.
After a few quarters of earnings acceleration, every one notices it and the reaction is more muted as the earnings get discounted.
While there is a vast effort by many speculators to anticipate such earnings acceleration and take positions in anticipation, even if you react to earnings and enter after the earnings announcement, you still can catch bulk of the move.
Typically first earnings acceleration is followed by more earnings acceleration or the improved earnings continues.
The structural factors which contribute to earnings acceleration do not disappear in one quarter. That is why earnings trends persist and price trends persist.
PEAD phenomenon is more pronounced in thinly traded stocks.
PEAD phenomenon is more pronounced in stocks with no analyst coverage.
PEAD returns persist even after one quarter.
PEAD is more pronounced on stocks with revenue surprise in addition to earnings surprise
While day traders look for one day moves on earnings day, for position traders or swing traders the PEAD phenomenon can offer longer duration picks.
After the day trading frenzy is over in these stocks , in many cases, they pullback and setup and go up after a breakout.
PEAD was relatively unknown phenomenon among retail traders around 6 to 7 years ago . Now everyone is aware of it and as a result many PEAD stocks tend to move big on earnings day often going up 20- 40% and then spend several weeks pulling back .
Buying after earnings is less risky as the news risk is out. However companies use the good news to time secondaries and this can lead to stocks with good earnings dropping aster few days of rally after earnings.
Secondaries for growing stocks are not a big problem as long as the money is used for expansion. Secondaries where the owners sell aggressively can be rally killer for a stock with excellent growth.
KORS is a poster child for this. After every good earnings announcement the owners have aggressively sold stocks in secondaries.
Buying after earnings is good strategy for position traders.
In a market driven by growth , you will find small companies offer best PEAD opportunities. In inefficiencies are greater on them.
When looking at earnings news, you also need to look at guidance. If the guidance is not in line with expectations, stocks can drop on earnings even if earnings are good.
Same way a stock with bad earnings will make big move if the guidance is good.
Larger companies are masters at manipulating investors earnings expectations through forward guidance and pre announcements. Genuine surprises on large caps tend to be rare. But when they happen they can signal significant shift in underlying business dynamics.
Best opportunity related to earnings is in small unknown company that suddenly starts growing rapidly.
When a small company with say below 50 million revenue starts growing suddenly in increments of 250 millions per quarter then you get explosive situation. This kind of growth happens in new segments or consumer products.
For example NTRI , CROX and HANS (now MNST) during the 2004 to 2007 periods became billion dollar plus companies in span of 4 to 6 quarters and correspondingly the price of their stock went up milti fold.
For a consumer product company with hot product , it is easy to grow rapidly as US has 300 million plus hungry consumers and if a product becomes hot must have product , it is easy for the companies to just plug in the product in existing distribution channel. Besides that most consumer products tend to have high margin.
For position traders finding such extreme growth situations should be top priority. A hot growth company if it takes off can make very explosive moves.
While such moves are not common in this market, there are market periods when such stocks dominate the market. This happens when new industry is being created. During the intenet expansion from 1990 to 2000 you had several hundred such companies. In the bull market of 2003 to 2007 the growth in BRIC countries and in commodities created hundreds of such extreme growth situations.
Become an extremist
Look for extreme earnings growth (just starting out to grow)
Look for extreme sales growth (just starting out and of magnitude likely to make the company a billion dollar company)
Look for extreme price strength ( just starting young trend with explosive first leg)
Look for extreme neglect (multi year , low float, low volume
You have to be first to find them as early as possible and not when everyone knows about it...
That is where big opportunity is in reading news.....
Are you serious about your trading?
If you are serious about your trading and want to build an enduring edge the Stockbee Member site might help you. Members tell me they have tried lot of things before coming to my site and it has offered them the most extensive and detailed methods to swing and position trade.
It is only for those who want to develop their own self sufficient trading method. It is not a stock picking service. It is service for you to build your own scans and trading method to have your own daily pick based on your method.
Be warned it will take you time to learn to trade. Learning to trade is difficult art and unless you are willing to spend months or years to perfect your strategy and also develop your mental edge you are unlikely to succeed in this game. Unless you understand that no site, no service, and no mentoring is going to work.
Why traders come to stockbee?
The member site is one of the most recommended site for learning to trade by other traders and bloggers. You will see no advertising, no hard marketing, no promotions, no free offers, no affiliate marketing, no incentive to other bloggers to promote the site, no constant twits self promoting the site, no free trial and no tall claims of making you instantly wealthy, and yet the site attracts new members everyday. Members come from all walks of life and all kinds of trading size and trading styles.
You will see that many trading bloggers have been using my market timing methods, scans , stock ranking lists and chart templates. They have developed their own methods based on my methods. Many paid newsletter site recommend my site to their subscriber for learning about trading and market.
Over the years thousands of traders have been members and those who benefited from the learning talk about the site to others or talk about the methods used and that is how new members learn about the site.
What will I learn in the members site?
The members site will give you in depth understanding to develop your own trading method. The emphasis is on making you self sufficient and confident of your own trading method and style.
As a member you will learn the basics of swing trading, momentum investing, growth investing and risk management.
You will learn about Stockbee Trend Intensity Breakouts method that uses momentum based swing trading to find 3 to 5 day swing trades for 8 to 40% profit.
You will learn about Stockbee Episodic Pivots Breakout method which uses Post Earnings Announcement Drift (PEAD) to find stocks that had a game changing earnings and that are likely to rally for 3 months to 12 months.
You will learn about Stockbee Dollar Breakout method that uses momentum, range expansion and swing trading approach to find 5 to 40 dollar moves in high priced stocks.
You will learn about Stockbee Lemonade Strategy for 401k which uses market timing and momentum to invest in 401k. You will get weekly update on how I am using the strategy on our 401k to do allocation decision.
You will learn about Stockbee Market Monitor method for market timing using breadth. It allows you to avoid risky periods in market and allows you to identify market turns. It is used for 401k allocation decisions.
You will learn about Stockbee Double Trouble method to find stock with confirmed upside momentum using anchored momentum and that are likely to continue their up move.
You will learn about Stockbee Night Time is Right Time method to find news catalyst based trade ideas for short term day trade and swing trade.
You will learn about Investor's Business Daily’s IBD 200 list and how it can be used to find swing trading candidates for explosive moves.
You will learn about Telechart 2000 and how to use it effectively to scan for swing and position trade ideas and to set up your 401k strategy.
You will learn about Jesse Livermore Range Breakout, Darvas Box setup, and many other member shared methods.
You will learn how to set up your own scans, select right kind of stocks, how to set up stops, when to enter , when to exit, how much to risk, how to track your trades and all other details about trading. You will learn about developing your own methods and not relying on others for trade ideas.
The site has hundreds of videos and trading methods and variation of methods. Members help each other in developing the methods and share actively their research and finding. A collaborative spirit allows you to get input from others on your trading ideas or problems.
The site gives you opportunity to interact with some of the most successful traders and learn from them about their trading methods. It is a vibrant community with members from different background and experience willing to help each other. The emphasis is on continuous learning and up gradation of market knowledge and setup knowledge. The members range from hedge fund employees, financial advisers, active swing traders, investors and new traders.
If you are looking to develop your own trading strategy the membership site might be for you. You have to be willing to put in the effort to build your own method. There are no silver bullets offered on members site. Every method, every scan, every nuance is detailed and all possible help is offered to design your own method.
Do you have a trial?
If you are just looking for trial you are better off trying thousands of other trading sites that offer free trial or one month trial and offer you promise of riches.
It is for those who are ready beyond the trial phase and ready to put serious months or years of efforts to learn to trade on their own. It is for those who want to learn to find their own fish.
The free blog has all the details about the methods I trade and if you go through the posts highlighted in the sidebar you will learn about them.
How can I become a member?
To sign up go to www.stockbee.biz and follow the sign up process. The site uses Paypal for payment processing.