The Art of Earnings Speculation - First Ask the Right Questions
If anybody tells you that "playing" earnings reports is the equivalent to pure-chance gambling is one or more of the following:
1) A person that has recently speculated in the wrong direction and lost all of his options equity in one afternoon
2) A very inexperienced trader or investor that plays "long ball" and thus does not waste time worrying about short-term events
3) Highly systematic traders that have tried and failed at programming the nuanced details required to properly identify highly reactive setups
The third point above is what this post is all about. Earnings speculation is wholeheartedly an artform; very little science can be applied to consistent success. Essentially, the keys to speculative success are:
i.) Understanding which information is most relevant toward picking out highly reactive situations
Start by simply asking the questions presented above (and at the bottom of this section for reference).
ii.) Mastering the concept of relativity; within the context of public reaction to financial news
Example: For the past three weeks, unemployment numbers have missed expectations. There is another report coming out in 15 minutes. But Tesla just reported that they just got FDA approval for a new model of EV that can administer anesthetics to urgent care patients being transported to the hospital in critical condition. In all likelihood, another miss on the unemployment front will certainly elicit another collective groan, however, the Tesla news will probably cause the net transaction of information to tick the market higher, all else equal.
iii.) Knowing that taking both sides of the report is essential to long-term success.
Firstly, Wall Street is the dictator of all earnings results. It is the collective average analyst expectations that determine a "beat" or a "miss." A top-line beat refers to a company's quarterly report that posted higher-than-expected revenues than was "estimated" by analysts. Top-line beats and misses have been more relevant in terms of creating highly reactive setups than those of the bottom-line variety. Bottom-line refers to actual earnings - the stuff at the bottom of the income statement that factors in all of the financial trickery companies can take advantage of to become more profitable. The market's recent focus on top-line is, in my opinion, therefore a more correct evaluation of future business success for any given company.
For the sake of brevity, I will keep the detailed explanations at a minimum for this post. Ultimately, this is meant to serve as a pre-cursor to those that have an interest in improving their returns when they do (inevitably) speculate on earnings reports.
If you find this information helpful, let me know in the comments section. There is so much that goes into successful earnings speculation that one post cannot possibly do it justice. Lastly, I have included the questions presented in the post at the bottom of this write-up for additional reference.
-Perma-Earnings-Pig
Questions to Ask Before an Earnings Report:
1) How has the stock reacted when it missed estimates in prior quarters?
2) In the same week, how have prices of stocks in the same industry group reacted to surprises in either direction?
3) Where in the last nine-month price range is the stock trading at over the last three weeks?
4) Has the market been trending upward since the prior month?
5) When (date, time, day of the week) is the report? What other companies are reporting at the same timeslot?
1) A person that has recently speculated in the wrong direction and lost all of his options equity in one afternoon
2) A very inexperienced trader or investor that plays "long ball" and thus does not waste time worrying about short-term events
3) Highly systematic traders that have tried and failed at programming the nuanced details required to properly identify highly reactive setups
The third point above is what this post is all about. Earnings speculation is wholeheartedly an artform; very little science can be applied to consistent success. Essentially, the keys to speculative success are:
i.) Understanding which information is most relevant toward picking out highly reactive situations
Start by simply asking the questions presented above (and at the bottom of this section for reference).
ii.) Mastering the concept of relativity; within the context of public reaction to financial news
Example: For the past three weeks, unemployment numbers have missed expectations. There is another report coming out in 15 minutes. But Tesla just reported that they just got FDA approval for a new model of EV that can administer anesthetics to urgent care patients being transported to the hospital in critical condition. In all likelihood, another miss on the unemployment front will certainly elicit another collective groan, however, the Tesla news will probably cause the net transaction of information to tick the market higher, all else equal.
iii.) Knowing that taking both sides of the report is essential to long-term success.
Firstly, Wall Street is the dictator of all earnings results. It is the collective average analyst expectations that determine a "beat" or a "miss." A top-line beat refers to a company's quarterly report that posted higher-than-expected revenues than was "estimated" by analysts. Top-line beats and misses have been more relevant in terms of creating highly reactive setups than those of the bottom-line variety. Bottom-line refers to actual earnings - the stuff at the bottom of the income statement that factors in all of the financial trickery companies can take advantage of to become more profitable. The market's recent focus on top-line is, in my opinion, therefore a more correct evaluation of future business success for any given company.
For the sake of brevity, I will keep the detailed explanations at a minimum for this post. Ultimately, this is meant to serve as a pre-cursor to those that have an interest in improving their returns when they do (inevitably) speculate on earnings reports.
If you find this information helpful, let me know in the comments section. There is so much that goes into successful earnings speculation that one post cannot possibly do it justice. Lastly, I have included the questions presented in the post at the bottom of this write-up for additional reference.
-Perma-Earnings-Pig
Questions to Ask Before an Earnings Report:
1) How has the stock reacted when it missed estimates in prior quarters?
2) In the same week, how have prices of stocks in the same industry group reacted to surprises in either direction?
3) Where in the last nine-month price range is the stock trading at over the last three weeks?
4) Has the market been trending upward since the prior month?
5) When (date, time, day of the week) is the report? What other companies are reporting at the same timeslot?