Good Earnings Are Priced In
After a few days of rally as expected the market action was lackluster on Tuesday. As large cap earnings com in to play, market participants are in a holding mood to wait and watch what happens.
The earning game works very differently on large caps. In case of large caps there is intense scrutiny of their every move and earnings are priced in much early. The only way to play earnings in them is to buy much before earnings or buy on earning related weakness if the stock reacts negatively. The strong moves coming in to earning season in the major indices was driven in large part by expectation of a very good earnings season. Now when expectations are high any disappointment or surprise or just meeting expectations is simply not good enough.
The price moves in many closely followed stocks are primarily an exercise in expectations. The actual numbers that are reported must be compared with how they measure up to those expectations. In case of established companies the market does a good job of pricing good news into shares by buying ahead of earnings. So following a pre earning drift strategy using analyst earning changes is a good strategy.That is the crux of many systems like Starmine, Value Line and Zacks Rank.
So coming in to this earning season, if the market is expecting good news, only exceptional news will attract more buyers. This is setting up the stage for a sell-the-news reaction when an earnings report is in line, or even slightly better than, analyst estimates. So look at the price drift pre earning in individual stocks before earnings are reported. If a stock is up already in anticipation and at top of its range, the next move will likely be down. So watch stocks like AAPL, GT, COH and NVDA and many others up majorly in last few quarters.
Obviously the real earning opportunty in every earning season is always in unloved, un followed stocks. Surprises by defination are more common in them.
The earning game works very differently on large caps. In case of large caps there is intense scrutiny of their every move and earnings are priced in much early. The only way to play earnings in them is to buy much before earnings or buy on earning related weakness if the stock reacts negatively. The strong moves coming in to earning season in the major indices was driven in large part by expectation of a very good earnings season. Now when expectations are high any disappointment or surprise or just meeting expectations is simply not good enough.
The price moves in many closely followed stocks are primarily an exercise in expectations. The actual numbers that are reported must be compared with how they measure up to those expectations. In case of established companies the market does a good job of pricing good news into shares by buying ahead of earnings. So following a pre earning drift strategy using analyst earning changes is a good strategy.That is the crux of many systems like Starmine, Value Line and Zacks Rank.
So coming in to this earning season, if the market is expecting good news, only exceptional news will attract more buyers. This is setting up the stage for a sell-the-news reaction when an earnings report is in line, or even slightly better than, analyst estimates. So look at the price drift pre earning in individual stocks before earnings are reported. If a stock is up already in anticipation and at top of its range, the next move will likely be down. So watch stocks like AAPL, GT, COH and NVDA and many others up majorly in last few quarters.
Obviously the real earning opportunty in every earning season is always in unloved, un followed stocks. Surprises by defination are more common in them.
Posts
3 comments:
One good thing about thinly traded, less-watched stocks is that their charts often get the news before it's released to the public.
Take a look at TSS. I posted about it over the long weekend, took a position at open on Tuesday based on the chart. Now, see the earnings release. I am in this, because I (a) noted when earnings were due and (b) watched the chart for suspicious activity pre-earnings.
Check Fly's blog for negativity about earnings. I find it better, for myself, to look for the sunny side of all market situations than to bitch about things. There are lots of situations I don't know how to play, that means there are lots of opportunities to improve.
TSS earnings are priced in. I would not call TSS a neglected stock at this level. It has analyst coverage. It is up around 50% since it guided higher on July 18 th 2006 (which was a surprise to market)
http://www.investor.reuters.wallst.com/stocks/key-developments.asp?rpc=66&ticker=TSS×tamp=20060718210100
Which triggered a high volume 10% breakout and it has rallied since then. It might go up but the kind of stocks which really make long moves are different.
A real surprise is when
a) significant earnings up for first time after a series of normal or below normal earnings e.g the sequence of EPS growth like 4, 5, 8 , 4 , 6 , 3 , 80
b) price growth in last 6 month to one year is less than 30% unless it is below 5 where it is less than 100%
c) No analyst and very low institutional holdings
d) technical analyst can not make a head or tale of the chart prior to earnings.
Then there is an explosive move.
Buying earning surprises at top end of price range like TSS can lead to negative surprises for traders.
Granted this is not a complete surprise and not completely neglected; I think it was a good play *yesterday* and that someone buying today is likely to be worse off than someone that bought when I did.
Regardless, money is committed.
:-)
We shall see. Not knocking your style at all, not suggesting either way is "better" or "worse," I was just focusing on the common ground between the plays, rather than focusing on the differences as you did in your reply! Common ground: that earnings matter and that volume associated with moves can give us clues as to what and when to buy or sell.
Post a Comment