Many investors/traders love to trade earnings. They are looking for that edge, getting in on the trade before the earnings report comes out to catch a big jump. In this economy and tremendously volatile market environment, trading earnings is not as easy to do. A stock can miss the earnings estimates and still goes up because the results are not as bad as some have feared; on the other hand, a stock can beat the estimates but goes down, perhaps with worse-than-expected guidance. Why take the risk guessing? You don’t necessarily need to trade “before” the earnings. Yes, there are ways to hedge and position oneself on both sides of the fence; but, most of the time, you still have to favor one direction to be able to make good profits.
In a market environment where many sectors are perceived as oversold, you can make good trades/investments “after” the earnings reports!
For example, I made a trade on GOOG yesterday. I bought GOOG February 330 calls at $12.7, and cashed them out today at $20 and $25:
GOOG jumped higher this morning, and, I cashed half of my position out early (so I’d feel more comfortable and basically playing the 2nd half on house money), and, waited a couple of more hours to cash the 2nd half out for almost +100% return overnight!
Why did I make this trade? Well, GOOG reported better-than-expect quarterly profits on 1/22, making $5.1 per share vs. the average estimate of $4.95 per share. Its revenue jumped +18% to $5.7 billion! In this economic environment, that’s huge!! The stock jumped $20 to close at almost $325 the next day. Let’s take a look at GOOG’s chart:
1) Even though GOOG jumped nearly $20 right after earnings, it has been sold off so much, it is really not that big of a move for a stock like GOOG. The next day, GOOG traded flat, but, very volatile.
2) Yesterday, GOOG start moving higher again and went above the initial jump after earnings!
3) That was my cue. I got in on those Feb 330 calls. And, today, GOOG jumped much more. Thanks in part to a stronger market environment.
Let me give you a couple of more examples. Let’s take a look at AAPL and IBM, both of which issued great earnings recently, and, they also demonstrate similar patterns.
1) Initial jump after strong earnings with sales topping $10 billion, destroying the estimates, trading at nearly $90. The next day, in traded with volatility and basically closed flat.
2) It goes back up higher on the 3rd day and above the initial jump.
3) After breaking above $90, it continued higher.
1) Big jump to almost $92 after good earnings and great forecast for 2009! Can’t chase it; let it come down a bit.
2) 3 days later, it went above the initial jump
3) It proceeded to break higher!
So, here the point: in a volatile environment it’s harder to trade ahead of earnings. But, because the market could be in an oversold environment and the expectations are not very high, some sectors are going to produce pretty good earnings reports. If the earnings are good, and the stocks are oversold, there’s much more distance to recover. Therefore, it leaves lots of room to enter good trades/investments after we have seen the report cards.
One thing, though, we always have to beware of the overall market environment. Pay attention to what market indices are doing:
SPX went above 850 today. That’s a big accomplishment, as this level has been a resistance for nearly 2 weeks (see my Market Forecast for the week)!! It stopped right at the 30-day MA, which also acts as a resistance. If SPX breaks above this 30-day MA (the black curve), it should head up to 900. This would allow the 3 stocks that we just talked about to go higher. Try applying the same principles to some of your favorite stocks that have earnings coming up! You may just find a good trade/investment for yourself!
Good night and HappyTrading! ™