Share:

April 11th is the earnings release date for Alcoa, Inc. This is considered to be the official start of the earnings season. Regardless of the earnings impact on the markets, one of the core concepts we teach at Online Trading Academy is the preservation of capital and the proper assessment of risk for any trade. The purpose of this article is not to teach you how to trade before an earnings release, that is extremely risky. Instead, the purpose of this article is to explain some of the actions you see after the earnings are released and the reasons behind the moves. Should you attempt to trade the earnings, it is much wiser to do so after the release and during the open hours of the market.

Earnings announcements, as we know are a company’s statement of how they performed over the last quarter. The number you typically see released is the Earnings Per Share or EPS. The EPS is simply the net income of the company, minus any dividends to be paid on preferred stock, divided by the number of outstanding shares. As an example, imagine a company earned $71,000,000 in the last 12 months after dividends. If we divide the earnings by the outstanding shares of that company, which happens to be 1,067,000,000 shares, we can see that the EPS was $0.07.

Analysts attempt to predict the earnings that will be released by the company every quarter. This can be an extremely difficult task and most analyst estimates are wrong 85% of the time. However, these estimates form public opinion and will be a benchmark set for those shareholders and watchers of the stock. So there are three things to watch for when traders are looking at earnings.

The first is the number released by the company in relationship to the analyst’s expectations. Obviously, if a company releases earnings that exceed an estimate investors perceive that as a good sign and will typically want to buy the stock thus raising the price. If the estimate is higher than the actual earnings, then shareholders will worry about the company and sell their shares thus driving prices down.

Stocks

The second key to the puzzle is what the company itself has to say about those earnings. Notice in the above picture the icon with a telephone and “T” or “W” next to it. This is the company’s conference call (telephone or web conference) where the CEO is able to address the shareholders and also guide the analysts for future earnings. This has a major impact on price direction as well. If you look at Synnex (SNX) near the bottom of the following earnings list, you will notice that they met their earnings estimates. However, look to the far right and take note of the red “G.” That icon tells us that in their conference call the company guided lower for future earnings releases.

Stocks

Stocks

Looking closer at the earnings, the company realized that they would be making less earnings for the next quarter. So, they attempt to set more realistic expectations for the analysts going forward. This can warn shareholders as well for future company activities. So how does this affect the stock’s price? Well, SNX met earnings, but with the lower guidance shareholders became nervous and sold off the stock.

Stocks

Lastly, is it possible for a company to meet or beat earnings estimates, have guidance come within expectations, but still have the price sell off? Absolutely! The third thing we need to watch for is a little known number called the whisper number. Many people refer to the whisper number as the real earnings estimate. It is a consensus number reached by an informal survey of professionals in the marketplace. They are observers of the companies but not official analysts. This is the true number that the earnings announcement must beat for the stock price to rise.

Stocks

Look at Paychex, (PAYX) they met their analyst estimates of $0.50 per share but the price dropped! This is due to the fact that they missed the whisper number of $0.51. Professionals gladly sold as excited investors bought, and they were rewarded as the buying pressure subsided and price dropped. I find the whisper numbers for free on a website appropriately named, www.whispernumber.com.

Stocks

Earnings release season is a volatile time. Having a better understanding of the forces driving price after the releases will increase your chances for success should you choose to trade the announcements. As always, avoid risky trades or ones that are outside of your comfort zone and have a plan for the trades you do take.


 

Learn to Trade Now

Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.

Editors’ Picks

EUR/USD keeps range above 1.0800 after German Retail Sales data

EUR/USD keeps range above 1.0800 after German Retail Sales data

EUR/USD struggles to gain traction and continues to move in a tight channel slightly above 1.0800. The data from Germany showed that Retail Sales declined by 1.9% on a monthly basis in February, making it difficult for the Euro to attract buyers.

EUR/USD News

GBP/USD stays depressed below 1.2650 amid market caution

GBP/USD stays depressed below 1.2650 amid market caution

GBP/USD remains defensive below 1.2650 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull. 

GBP/USD News

Japanese Yen remains on the defensive, bears turn cautious amid intervention fears

Japanese Yen remains on the defensive, bears turn cautious amid intervention fears

The Japanese Yen meets with a fresh supply in the wake of the BoJ’s dovish outlook. Fed Governor Waller’s hawkish comments underpin the USD, supporting USD/JPY. Thursday’s US macro data is eyed for some impetus ahead of the PCE data on Friday.

USD/JPY News

Editors’ Picks

EUR/USD keeps range above 1.0800 after German Retail Sales data

EUR/USD keeps range above 1.0800 after German Retail Sales data

EUR/USD struggles to gain traction and continues to move in a tight channel slightly above 1.0800. The data from Germany showed that Retail Sales declined by 1.9% on a monthly basis in February, making it difficult for the Euro to attract buyers.

EUR/USD News

GBP/USD stays depressed below 1.2650 amid market caution

GBP/USD stays depressed below 1.2650 amid market caution

GBP/USD remains defensive below 1.2650 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull. 

GBP/USD News

Gold eyes daily close above $2,200 for a sustained uptrend

Gold eyes daily close above $2,200 for a sustained uptrend

Gold price is duplicating the move seen in Wednesday’s Asian trading, as it edges lower below $2,200 early Wednesday. Gold capitalizes on sustained US Dollar strength and a rebounding US Treasury bond yields struggle, as traders take account of the latest hawkish US Fed commentary.

Gold News

XRP ruling by Judge Torres denied in Coinbase lawsuit, yet another blow to Ripple

XRP ruling by Judge Torres denied in Coinbase lawsuit, yet another blow to Ripple

XRP programmatic sales ruling by Judge Torres completely rejected by US Court in Coinbase lawsuit. US Court rejected Coinbase’ motion to dismiss SEC lawsuit, weighing heavily on Ripple’s legal battle.

Read more

The other terminal rate: How far will policy rates be cut?

The other terminal rate: How far will policy rates be cut?

Recent communication by the Federal Reserve and the ECB has made it clear that the first cut in official interest rates is coming. Both central banks are saying the same but the ECB communication is more opaque than that of the Fed.

Read more

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology