The first month of each quarter brings the coveted earnings season in stocks. It's the time investors get all the need to know and updated information from CEOs and companies explaining what happened the last three months and why it will be better in the future.
But, how many times has a company announced great earnings, better future earnings, and then the stock still sells off? Positive earnings selloffs seem to occur as often as positive earnings rallies. Given the evidence, how do positive earnings then equate to good buying opportunities? Forgive me if I am not as gung-ho about earnings seasons, CEO rhetoric, or linear extrapolation as most traditional analysts. Like you, I was around in 2007 and 2008 as CEOs time and again stated ever-positive outlooks for the future as their share prices continued to fall.
News and company press releases typically try to frame the earnings into positive headlines as shown below:
- "Abbott ( ABT ) Reports Strong Second Quarter Results" - Abbott Investor's Relations Press Release , July 18, 2012 (Even though earnings were a self-proclaimed "strong", the price stalled out that day at $65.93 with a popular candlestick pattern and as of today (7/23) was down 2.5% to $64.27, evidently "strong" earnings weren't enough to drive price higher.)
- "Groupon Earnings Top Forecast; Shares Jump" - CNBC, May 2012 (After popping above $14.00 on the earnings announcement after hours, Groupon (NasdaqGS: GRPN) finished the next day selling from the get go ending the day at $12.25, slightly ahead of its pre-earnings share price of $11.75. It finished the month, 2 weeks later, at $10.60 and down significantly from its pre-earnings price. It currently sits in the $7 price range as we approach its earnings season yet again.)
Much of the information given during earnings season is from the past a nd doesn't help anyways. Learning about 2Q profits in July is best summed up by one of Shakespeare's quotes, "Better three hours too soon than a minute too late". There's really nothing anyone can do about the second quarter now.
Some look to earnings season to get guidance about upcoming quarters and years, but do CEOs really know much more than you about the future of stock prices? They may know more about how their individual company will perform fundamentally, but they do not know how people or stock prices will respond to that performance. They also do not control their multiples or other necessary valuation inputs. Once again I refer to the 2007 and 2008 time frame as an example. Unfortunately for company share prices, it seems the macro environment matters a whole lot more than many company insiders will admit.
Price is what makes you money and, along with dividends, is what really matters to investors and traders. Combining the current price with its recent history allows trends to be recognized through time. It also helps show us if earnings will be a catalyst for stock prices well before a CEO will tell us, or will even really know.
In a recent ETF Profit Strategy Update, shown in the chart below, key price levels are identified as important support and resistances that will help traders know if earnings are going to be a catalyst or a drag on stock prices. Currently there is a key technical formation taking place that sets up a trading opportunity in the S&P 500 for bears and another opportunity in another asset class for longpositions.
This month the ETF Profit Strategy Newsletter identified key support and resistance levels on the S&P 500 (SNP: ^GSPC - News) - (NYSEArca: SPY), the Volatility Index (ChicagoOptions: ^VIX), the CurrencyShares Euro Trust (NYSEArca: FXE), the SPDR Gold Shares (NYSEArca: GLD), and the iShares Silver Trust (NYSEArca: SLV). We also focus on popular ETPs such as the iShares 20+ Year Treasury Bond (NYSEArca: TLT), the iShares Russell 2000 (NYSEArca: IWM) and the SPDR Dow Jones Industrial Average (NYSEArca: DIA).
Price, not earnings, is all that matters when it comes to profitable trades. The ETF Profit Strategy Newsletter identifies those key price levels through comprehensive technical analysis along with practical and actionable commentary to help investors stay on the right side of the market during the volatile earning seasons.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.