1/29/2010

Earnings Season and the Cinderella strategy







Currently we are in a earnings season and that offers lot of opportunities for profit. 

Behind every major move is a earnings acceleration. 

The earning season provides you with the ability to identify such stocks. 

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.

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.

This is well documented phenomenon in the market and it is called PEAD or Post Earnings Announcement Drift.






PEAD is 40 year old concept



Ball and Brown in 1968 first documented the PEAD anomaly. 

As its name suggests, the PEAD is the tendency of stocks that beat earnings expectations to continue to drift upwards after the announcement, or likewise for stocks that miss earnings to continue to drift downwards. 

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.

1989 more research on PEAD


In 1989 a paper was published (Bernard, V. and J. Thomas, 1989, "Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium." Journal of Accounting Research. Vol 27 Supplement 1989, 1-36) which further enhanced the study of PEAD and demolished much of the objection of efficient market theorist to PEAD. 

Bearnard and Thomas work is considered one of the most definitive work in this field.
PEAD generates 6.3% abnormal return in 60 days


As is customary in all finance research designs, the author form deciles based on each event’s standardized unexpected earnings (SUE).

 This means that the highest decile contains the stocks that beat expectations the most, while the lowest decile contains the stocks that missed estimates by the most. 

The authors confirm the results of prior work, namely that going long the highest SUE decile and short the lowest SUE decile would yield abnormal returns of 6.3% in 60 days or 25% annualised. 

They also confirm that there is an inverse relationship between firm size and resulting drift.
What you need to know about PEAD


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



Earnings expectation cycle

Merrill Lynch quantitative strategist Richard Bernstein in his book 
Style Investing: Unique Insight Into Equity Management  offers a very useful conceptual framework for understanding the role of earnings and earnings expectations in stocks price growth. 


Bernstein's earnings expectations model compares earnings expectations of a typical company on a clock face.

When a company is at its pinnacle in growth term it is at 12.00 midnight. In his book he offers a strategy to identify stocks early enough in their growth cycle.

 The idea is to find growth stocks early enough but not to overstay the party. 

That is why the name Cinderella strategy- you should not overstay the growth party and must leave the party before midnight. 

The strategy basically offers a choice of value investing or growth investing based on how early you identify earnings potential of a stock.

12 to 3

12 o’clock: The company’s earnings are high and expectations are also very high
1 o’clock: Torpedo is a negative earning surprise
3 o’clock: Analysts revise earnings estimates downward. Growth investors abandon the stock.\
This is where short selling strategies work. 


3 to 6 

4 o’clock: Earnings expectations continue to fall dramatically.
6 o’clock: At some stage earnings expectations reach their low point. At this point most of the bad news is priced in. Expectations are at lowest level. Contrarian investors focus here.


6 to 9

6 o'clock:This is where value investors focus. Value investors want to buy stocks neglected by market but which have the potential to surprise on earnings front. They want to buy it before the earning surprise. One of the risk of value approach is if you buy too early, you have to wait a long time.
7 o’clock: Stock has a positive earnings surprise. If it is a genuine turnaround there will be more surprises down the line.
9 o’clock: Market starts to recognize the stock and its earning potential.


9 to 12
This is where primarily growth investors focus. They want companies that have exhibited consistent earnings growth over several quarters. They pay premium for such stocks as the stock has already moved from low expectations to high. The value investors pass on these stocks to growth investors during this transition phase. The risk of growth investing is overstaying the party beyond midnight.
11 o’clock: Everyone becomes aware of the company.
12 o’clock: Earnings and earnings expectations reach peak.

The CANSLIM strategy primarily operates in the 9 to 12 quadrant. 

That is one of the reason many of the stocks on IBD 100 can break down also after appearing in the list. 


Earnings lead breakouts operates primarily in the 6 to 9 quadrant. 


Building a mix of earnings based strategies in the 6 to 12'o clock time frame gives you best of both worlds.


Mark Minervini's SEPA


If you go to Mark Minervini's site and look at his SEPA model, he illustrates this fact with a picture. This model is very similar to Bernstein's model.

[minervini.jpg]
Mark Minervini's SEPA model

Earnings surprise and neglect are two essential elements to finding the big movers. 

Every earnings season these two things come together to create mispriced opportunities. 


If you want to profit from that then look for big earnings surprises. 


Earnings breakouts

It is earnings season. Market might have been weak, but stocks with earnings surprise still  had positive response:

ALGN
DLX
EK
GMCR
NFLX
NOK

Earnings season is season of opportunity if you know what to look for in earnings.

1/28/2010

Mark Minervini on Earnings

Mark Minervini the highly secretive trader featured in Market Wizard  has started a blog and he has been talking about his method and offering some picks.

His two recent posts on earnings are good read.
Earnings Part1
Earnings Part2 

25 stocks with momentum

After few weeks of selling, there has been some churn in the the top ranked momentum stocks. But many have survived the selling without much damage and have had orderly pullback or sideways move.
Once the market bounces back many of these will be first to breakout.

ASYS
BARE
CNU
CYTX
DAL
EWBC
HPJ
HUSA
ICOC
LYV
MAPP
MMR
MNI
MSPD
REV
SANM
SEED
SORL
SPRD
SWSI
TRGL
UAUA
WPZ
XTEX
XTXI

1/27/2010

What is market breadth telling us



Market Monitor


Market Monitor
Market Monitor is market breadth
based market timing tool

Current View
Cautious
Mrket has given up early gains 2 days in a row.
Which is a sign of weak market.




TypeIndicatorValueComments




Daily # of stocks up 4% plus on high volume102
Daily# of stocks down 4% plus on high volume168Another negative day
Primary# of stocks up 25% plus in a quarter916
Primary# of stocks down 25% plus in a quarter389
Secondary# of stocks up 50% plus in a month3
Secondary# of stocks down 50% plus in a month1
Secondary# of stocks up 25% plus in a month51
Secondary# of stocks down 25% plus in a month30
Primary fast# of stocks up 13% in 34 days (bullish)981
Primary Fast# of stocks down 13% in 34 days (bearish)1066
MMA+% of stocks above their multiple moving averages37
MMA-% of stocks below their multiple moving averages25
10 day cumulative
breadth ratio
Ratio of socks up 4% to down 4% in last 10 days0.64Approaching .5
Below .5 is bearish


1/26/2010

Trading preparation checklist


1
What is your market bias for today?
Is there a plan to exploit it?
Is there a alternative plan?

2
What homework have you done for trading today?
What are 2-3 pre identified opportunities?
What is your plan for each open position?

3
What is working in the market currently?
What sectors are leading the market?
What style is working (growth, value, momentum, contrarian, junk)?

4
Are you set up for trading today?
Is your hardware in proper condition?
Are your software's set up for trading?

5
Are you calm, excited, harried, or confused?
What can you do to be in calm and controlled state?
What is driving your emotional state

6
What is your plan today for enhancing your:
market knowledge
your trading skills
your psychological control

7
What needs to happen for me to be a confident and in control trader
Do I have resources to get there?
Do I have the burning drive to get there?

1/25/2010

Watchlist for Monday

In the short run bounce might be most probable move. But bounce will likely fail. So many strong stocks will rollover.
Will be watching these for possible rollover:

  • ewbc
  • dal;
  • cqp
  • teso
  • sanm
  • apl
  • mmr
  • uaua
  • stxi
  • stex
  • swsi

1/22/2010

A 10% plus correction would be good


  • The market has not had 10% or more correction for months.
  • If this develops in to a proper multi week/multi month correction it would be good.
  • Correction seperates strong multi month leaders from speculative stocks.
  • With a 4th down days in last 6 to 7 days, this looks like a correction.
  • But so far betting on correction in this market has not worked.
  • Most corrections have been minor and the buy the dip strategy has worked.
  • The "International Leaders" seems to be the first to break. 
  • That ties in very well with the IBD starting a new page about them.

1/21/2010

10 stocks likely to breakout today


  1. hpj
  2. seed
  3. pcx
  4. nep
  5. mspd
  6. sorl
  7. dan
  8. nvmi
  9. mni
  10. tstc (this could have been a buy today)

1/20/2010

Understanding types of memories


To become a better trader you need to understand our memory and how it functions. If you understand how memory works, you would learn trading much faster.
Types of memories:
  1. Short term memory or working memory
  2. Long Term Memory 
    1. Explicit
      1. episodic
      2. semantic
    2. Implicit
      1. Procedural memory
      2. Priming memory
There are two basic types of memories: long-term memory and short-term memory.
Short-term memory is also called working memory.
Short-term memory is where most of the learning happens.
Long-term memory is primarily used for storage.
When we learn something it is stored in long-term memory.
The two types of long-term memories, explicit memory and implicit memory.
Explicit memories also called conscious memory.
Within explicit memories there are two types of memories: episodic memories and semantic memories.
Episodic memories deal with specific events and their context, for example your first date memories are stored in episodic memories.
Semantic memories deal with the knowledge about the world, for example what is the capital of Uganda is stored in semantic memory. Most books on trading deal with semantic memory.
Implicit memories is unconscious memory. Implicit memory is where automation happens. Implicit memory is where procedural knowledge is stored.
Expertise in trading is primarily about developing implicit memories or more specifically procedural memories.
Implicit memories are very difficult to verbalize. 

The contents of procedural long term memory cannot verbally be explained. (Can you explain how you ride a bike?)

Performance of activities or demonstration of skills is the only method to convey procedural long term memory.

This is why the new traders are often frustrated.If you want to change your trading behavior  you have to change your procedural memory.

That is true not only of trading but also of life in general.

I'll have more details about procedural memory and how to train it tomorrow.




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.

Stocks likely to breakout today

  1. nvmi
  2. nep
  3. tstc
  4. gfre
  5. seed
  6. caas
  7. hpj
  8. dan
  9. xtex
  10. uaua

1/19/2010

What color is Dan Zanger's underwear


To trade profitable you need a method and a setup. In the beginning you have very little understanding of the market and how it works and what is a good setup and what is not a good setup. In stock market there are so many different setups used by people. Some of it is pure voodoo and some actually works. The easier solution for it is to model your trading on someone with big returns.




Dan zanger converted 11000 in to $18 million in 18 months


That is a return of 164000%. Before doing that he had blown up his account many  times he claims.


If we study in detail what was the secret of his astounding returns then we may be able to generate good returns.


Following someone who makes 10% in a year will at best make you 5% in a year, better buy Index fund and retire from trading.


If you have to model your method you might as well do it on someone like Dan Zanger.


That was my thinking so I studied in microscopic detail every single thing about Zanger and his method during his explosive returns period.


Since then he has changed his method a lot as he trades larger account.





Dan Zanger talks a lot about chartpatterns


In fact the name of his website itself is www.chartpattern.com . So did he discover some amazing and secret chart pattern?


If it was so you just have to find that pattern and trading is very easy.


What really is the pattern that made him 18 millions.


There are obvious answers. But remember things are not always as they look.


Chart pattern is small part of the Dan Zanger mystic.




The surprise behind Dan Zanger returns



In fact if you study very carefully the history of his trading during his explosive returns phase , you would instantly recognise the role of earnings and earnings announcements in timing of his entry.


In the initial years, it would be all about low float stocks which has announced 100% plus kind of earnings. He would enter based on earnings plus chart patterns.


Those stocks make those blowout moves because of earnings and low float.


Now with bigger account he has started focusing on large caps with earnings.


Chart pattern is part of the story but the basic fundamental reason for those moves is very important.


The 400 stocks he monitors stock patterns on and trade are all with extremely high earning growth or momentum.



Dan Zanger is a momentum trader


The second thing you will realise is that he basically selects momentum stocks.


The stocks he trades have price and sector momentum.


He looks for chart pattern on those kind of stocks.


His most often highlighted patterns are bull flags and triangles.


Besides that he talks of 10 patterns on such stocks with explosive earnings and momentum.







Dan Zanger used to trade small  stocks


When he made 164000 returns most of his trades were on small float stocks.


Stocks with less than 25 million float.


Many had less than 10 million float.


Most traders trade too big a float stocks. Unless you are a day trader , you should not trade big float stock.


Big float stock have very low probability of making big explosive moves.


If you have small account you have tremendous advantage in trading small float and small cap stocks.


Smaller stocks have greater variability in earnings growth due to their size.


So a small change in business climate can lead to sudden jump in earnings.


That results in big explosive move.




Dan Zanger used to bet the farm on big ideas


If he had a big idea he would load up like crazy.


He would often have his full account in one idea.


In the market there are plenty of small 20 to 30% kind of ideas, but once in a while you find a perfect  idea with explosive potential, that is where you can really make big money.


But to bet big and that too on margin requires confidence in your skills and ideas.




Dan Zanger was a IBD follower




Dan Zanger in one of his interviews said he has read William O'Neil's book more than 100 times and he continues to read it every now and then.




If you study the people who have made big returns in the market, you will find again and again the same thing: most of them are growth investors.


Only growth stocks make big explosive moves during their hyper growth phase.


What color underwear does he wear


This is just topline highlights of his method.


If you study his method in detail you can fill up over 200 pages of notes.


If you are looking for developing a method to find such explosive stocks you need to do your own detailed analysis of his method .


Find out every single detail about his method.

If the  secret behind his explosive returns is red Gucci underwear, then wear it and trade.







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.