Trading off of Earnings...It's Not What It Used to Be

It's that time again! We know that every three months traders and investors wait anxiously for earnings season to start.  After all, it's earnings that drive the growth in stock prices, at least fundamentally.  The big guessing game starts this week for the recently completed third quarter.  Did companies have a good showing?  Are sales growing, and what about their outlook for the future?  Is the bar lowered enough to beat estimates?  Has the market run too far ahead to make those earnings palatable to buy stocks?  Those questions and many others will be answered in the weeks to come.    

Trading off of Earnings...It's Not What It Used to Be  

I used to make a living trading around earnings.  It's usually the best time to trade...especially when volatility is low.  Get on the right side of an earnings play and you're talkin' a cool 200-300% return overnight!   Back in the day it was hit or miss, but the charts and volume usually told the story prior to it being presented.  Sure there was risk, but if you get paid for taking the risk then it can be justified.  Today, I don't play that many names prior to earnings, but will do so on a very rare occasion.  The risk/reward profile is not always that attractive, but playing a name AFTER earnings can be a nice move after the volatility implosion occurs.  Patience is usually required, as well as the proper setup.     

Earnings Estimates and Revisions...Never Get 'em Right!  

Wall Street victimizes the little guy.  The research distributed to the select few allow some to get into names before being pumped.  The earnings estimates passed out on the 'street are notoriously bad, though, and usually have a poor track record...so why would anyone give two bits to find out?   Take RIMM for instance.  They blew a hole in their stock price by missing the target AND lowering future numbers.  The analysts?  All of them completely missed the boat on this one, as 4-5 of them upped numbers and ratings just a week before the report!   In fact, it was the analyst estimates that got the banks/iBrokers so wrong in 2008, and most insisted on recommending these stocks with a buy...as they were plummeting down the tubes!  Regardless, we must always take this advice at face value, and realize where it's coming from.  The so-called 'Chinese Wall' has been down for years, and we must know there is always some dealing that occurs between research and the sell-side analysts.   

Last Earnings Season Was Bullish, but this One?  

Well, sorta.  Basically, the analysts lowered estimates for second quarter, making it incredibly hard NOT to beat the numbers.  Hence, we had that nice big move in the markets from July thru Mid September.  We don't know too much of what to expect and why, however some signs of consumer slowdown are evident.  Perhaps the strain from more job losses is going to trigger some shock.  We can pretty much assume certain stocks and groups had a good quarter, but it's always about the outlook.  If that becomes a message of concern we may see this rally stall, which could bring the Grinch out for X-mas.

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