Quarterly the companies that trade their shares in the market have to present their earnings report. This is always a season that makes investors and traders very nervous, it´s like showing the results at the end of the course and see if the grade is a fail or pass, and in case of failing, how ugly this failure was.
Before the earnings report is released Wall Street analysts make an estimate of the earnings for the quarter, if the earnings report beats estimates, most of the times it means the share price will raise, if not it will fall. Trading during the earnings season is always a double edged sword, the best case scenario is to be with wall street estimates and see the company beat those, this will create a buy pressure the day after, raising the price of the stock and leading to fast profits. If the results are lower then the price will fall, the stop losses levels are hit and the price goes down aggressively. A good advice, don’t try to trade on the session right after the ER was presented, because it means you’ll arrive too late to the party, when the gap has already formed and people are ready to take profits. And avoid trading before the ER, it becomes risky and it’s a greedy attitude, you may win or may lose, and that is betting, not trading. There are people who like the excitement of betting this way, but be aware that this specific trade is gambling and your money is at a high risk.
On the other hand, there is not only the reaction to the number reported by itself. The market evaluates the chances of the company to maintain growth for the next earnings report, the company outlook. Even good numbers in the ER, may lead to a drop in the share price if the future for the company is not clear.
There are a couple of cases. Goldman Sachs ($GS) displayed an outstanding ER that the market interpreted as probably overrated, on July 16th, 2013 $GS reported an EPS of 3.70 vs. an estimated $2.82, and the market let the price of the stock fall down from $163.86 at the open to $160.21 on the close. Weren't those good numbers? These are the kinds of surprises that you may find. In the market everything behaves after certain rules, except when they don’t. So what is your position during the Earnings Season? Step outside, wait and see, or enter the casino?
Now what happens after the Earning Season? Once the dust has settled and a trend has been established it is the time to ride the stock. The ER can create a gap up or a gap down, very good for traders who ride the 5 to 8 day period after the gap and then mount on the new trend. The ER opens a new history in the stock price and a it may ignite a new trend, either up or down, so in my opinion, a wait and see strategy is a better, non greedy, less stressful and more conservative attitude during the incertitude of the ER. You're not forced to enter the market at this point, you can always enter the market.
