Message #2 From:
Larry Porter Date: June 5, 2007 01:59:51 PM
Why Sell Before the Earnings Report?
Here’s an all-too familiar scenario that leaves traders scratching their heads: 1) Your favorite stock rallies in the days before the company releases its quarterly earnings report; 2) The company beats the earnings estimates from analysts; 3) Immediately after the positive earnings news hits the wires, the stock sells off.
After getting burned in this manner a few times, we established a policy of selling our short-term stock positions during the session prior to the earnings release. Here’s why: If the market is pouting or in a gradual downswing, almost 90% of earnings releases will be met with selling. When the market is flat about 70% will be met with selling, and when the market is in a strong upward move, about 50% will sell off regardless of how well they did.
The wise trader won’t argue with those numbers. Sure, sometimes you’ll sell out and the stock will jump after the earnings release. But the odds are against it.
When a stock announces great numbers and gets smacked down, it is usually the fault of the momentum players who hop on a stock two weeks before earnings and then bail out. But then the small fund guys will dump, and they may need to get out of 20-50,000 shares, and they use the strength of the late earnings runup to sell.
But those fund managers will notice a company that reports solid earnings, and they will start nibbling on the stock in anticipation of a move into the next earnings release. That’s when to re-enter a position—when the carnage is over and investors are finally responding to the strength of the company’s profit picture.
If you are a longer-term holder, hold the solid stock right up to the next release, and if the overall market mood is decent you will be rewarded. If your time span is much shorter, catch the initial rebound, sell out, and make a note of that stock for the next earnings season. Then two weeks (or even three) before the next reporting season, take another position. And don’t forget to sell before the earnings report arrives!
Note: Earnings reports can be released shortly after the close of a market session, in the morning before the start of a new session, or even during a session. Check with the investor relations department at the company to get a firm release time and date, and then make your move accordingly.
