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How You Can Use Earnings Season to Beat Wall Street Pros

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Stocks have rallied well off the March lows that were fueled by COVID-19 panic selling. However, many question if we are out of the woods when it comes to the virus.

As the country reopens, there are cases spiking across the country which is creating some fear among investors on whether stocks might see another sell off like they did in March. Additionally, there are questions surrounding the economic damage done by the lockdowns and if it has been fully realized or if the market has priced that in.

But here is the thing…

Thanks to the Fed, none of that matters!

The Fed has gone to war with COVID-19 and they are winning. Quantitative easing, zero interest rates and massive liquidity has created a bubble-like environment. An army of amateur retail day traders has taken notice and is driving individual stocks to all-time highs, despite all the negative news.

The opportunities are plentiful and there are traders making money hand over fist. Perhaps the greatest chance to profit in 2020 is coming over the next couple of months, when the most important earnings season in a decade comes our way.

Because of the uncertainty surrounding corporate earnings, the moves both higher and lower after companies report will be historic. It will be commonplace to see the stock prices after earnings yield big moves of 10-30% in a single day, which means your opportunity to make money is greater than ever.

What is earnings season? 

Earnings season happens four times a year and is typically the busiest around weeks four through seven of the quarter. This is when the majority of the S&P 500 companies report how their business has done in the previous quarter. A company reports revenue and a bottom-line number called earnings per share, or EPS. This number is basically the company’s profit for each outstanding share of common stock.

Often the company will have a conference call and issue guidance for the quarter or year ahead. This gives analysts, traders and investors a clear picture of what to expect in the coming quarter. 

More . . .


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Profits in the Aftermath: Ends Sunday, July 12


If you’ve been in the market for any length of time, you’ve probably seen a perfectly good stock nosedive in price for no apparent reason. You may be looking at the aftermath of computer-driven high-frequency trading activity. Their favorite tactic is to trigger panic selling on a strong company. They buy as it bottoms and collect big gains as price returns to a normal level.

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Why do stocks move so much after earnings?

Traders will quickly react to the news, buying or selling the stock based on whether that outlook is positive or negative. If the news is a surprise, the market can be shocked and react in a major way. This is why a stock can move over 10% in one day. 

In today’s modern markets, computer algorithms can actually read headlines and trade off of them in a heartbeat. These computers can react quicker than humans, often causing irrational moves higher or lower. The big moves can lead to human panic as they see their stock dropping fast and their losses adding up. 

It’s hard for humans to win the speed game, but with patience and a little discipline, investors are taking advantage of the irrational moves the computer traders create. Buying a stock after earnings move lower is a strategy working over and over again for many traders.  

These post-earnings bounce plays can lead to 10-30% gains in a matter of months, weeks or even days!

COVID-19 Will Amplify Stock Movements

With so much uncertainty surrounding the current market environment, it’s hard for market participants to price stocks. When a company reports earnings and gives guidance, traders will be given some clarity and will be able to price accordingly.

This “repricing “of a stock will cause big moves, both up and down. If stock “A” sold off 50% in the recent correction and the outlook isn’t as bad as expected, we could see a 20-30% rally. However, if stock “B” was down 30% and the news is worse than expected, we could see another big drop lower.

How to Trade Post Earnings

Whether you are trading earnings before or after the number, knowing who is
reporting is key. Paying attention to the list of companies reporting every week can be found via the Zacks Earnings Calendar.

Use these steps below to find ripe opportunities after a stock has reported earnings.

1) Watch for Moves in the Zacks Rank – The first step I take is to check the recent Zacks Rank #1 (Strong Buy) stocks every morning. When I see a fresh stock on the list that has recently moved lower in price due to earnings, I get interested. I then check the EPS numbers and guidance to make sure there was no big negative signal. If not, I go on to the estimates page for the stock and see if analysts are taking the numbers up or down.

Why would investors sell a stock, when analysts are raising estimates and still bullish? Well, this makes me think there is some manipulation brewing and the stock has moved irrationally lower.

2) Check for Technical Support- After the fundamentals check out, it’s time to look at the chart. Moving averages, trend lines and Fibonacci levels are used as support levels by computer and human traders alike. If I see a level tested and support is confirmed, it’s time to buy.

3) Entry Price, Target and Stop Loss- Entering the stock takes patience, but it’s crucial that you get in at a decent price. When entering a trade, you should have a target, or even multiple targets, where you will sell and close out a winning trade.

Capital preservation is paramount. Stop losses are important for investors and traders so they can live to fight another day. You must not get married to a stock! Taking losses are just as important as taking winners and stop loss orders assist in that discipline.

How to Capitalize

This won’t be a typical recession or a typical stock-trading environment. The Fed is throwing every type of stimulus at the economy and investors should take advantage of the bubble that will be created.

The opportunities during this earnings season will be plentiful due to the recent volatility. And I plan to be in before and after earnings depending on the situation and look forward to capturing the big moves coming our way.

The mission of my portfolio, Zacks Counterstrike, will be to catch these big moves, playing both long and short sides of the market. Our goal is to generate quick and consistent double-digit gains. Recently, in fact, we’ve closed gains of +70.22%, +35.67%, and even one for +10.00% in just 1 day.¹

Check out this portfolio today and you may also download our just-released Special Report, 7 Best Stocks for the Next 30 Days. Our experts comb through 220 Zacks Rank #1 Strong Buys to pinpoint 7 that are primed to break out the soonest.

Important: To maximize the profit potential of our recommendations, we must limit the number of members who have access to the Counterstrike portfolio. This opportunity ends midnight Sunday, July 12.

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Wishing you great financial success,

Jeremy

Jeremy Mullin has been a professional trader for more than 15 years with specific expertise in profiting from patterns set by High-Frequency Traders. He is the editor of Zacks Counterstrike.

¹ The results listed above are not (or may not be) representative of the performance of all selec-tions made by Zacks Investment Research's newsletter editors.