Earnings season is underway. It’s still early, but the trend is already troubling.
Through the end of last week, 29 of the companies in the S&P 500 Index had reported results for the fourth quarter of 2023. As usual, about three quarters beat expectations.
The long-term average beat rate is about 74%. So far, 76% reported better-than-expected results.
Under the surface, the numbers are below average. There have been some big misses. Citigroup, (NYSE: C) for example, was expected to report earnings of $0.11 per share. Instead, C lost $1.16.
If companies continue missing at this level, index earnings will be down 9.8% compared to a year ago.
This is a bad news/good news situation. It’s bad news for the market — but good news for those who can spot the perfect trading opportunities brewing in this environment…
A Smart Way to Trade Earnings Season
Unfortunately, weaker earnings could weigh on the stock market. Prices in major indexes could decline along with earnings.
But the positive news is that traders get plenty of short-term trading opportunities. Even though earnings are down almost 10%, about three quarters of the companies that reported beat expectations.
Many of those stocks will rally on the news, and there’s a perfectly logical reason behind that.
You see, stock prices reflect all of the information available about the underlying company. And earnings provide new information.
Traders need to react to that information, and they often push the price of the stock up or down by a large amount.
While traders are reacting, analysts are plugging the new information into their models. This allows them to revise their estimates for next quarter and update their price targets.
Analysts use all this to update their reports. Then the process slows down a little bit. Analyst reports need to go through a prerelease process at major Wall Street firms.
This process (required by SEC rules) can take some time. The period varies by firm with some able to get research released in a few hours, while others need a few days or even weeks.
That’s why analyst upgrades, or downgrades, tend to trickle out over several weeks.
Each new report can reinforce a stock’s trend. Researchers call this post-earnings announcement drift because prices tend to drift in the direction of the initial reaction for some time after earnings day. This can take days or weeks.
Knowing this, we can ride these predictable price movements to our advantage by following the right signals.
This quarter, I’ll be introducing a new strategy to Precision Profits to trade the post-earnings announcement drift.
To learn how you can jump in on the opportunity to trade this strategy (along with several others) click here.
Regards,
Michael Carr
Editor, Precision Profits
