How to Profit as Wall Street Fumbles on Earnings
- Companies will report on their pandemic-era earnings shortly.
- Wall Street can make strange forecasts around these earnings results. This gives us an opportunity.
- Chad Shoop breaks down his favorite strategy to use during earnings season.
Today marks the end of a historic quarter for the economy … and for the stock market.
What is set to unfold in the coming weeks will confirm, or walk back, the current stock market rally.
There’s that much on the line in this earnings season.
That makes it by far one of the most important earnings seasons in the past decade.
With June 30 in the books today, the second quarter of the year — the months of April, May and June — has come to an end.
Over the next few weeks, corporations across America will begin opening their books and giving us a look at how the pandemic impacted their businesses.
It could very well make or break the current stock market rally.
But I’m not concerned one bit.
We Don’t Gamble, We Do Research
I don’t trade on the news headlines.
I focus on short-term trades lasting weeks or months. Yes, they are impacted by the volatility we have seen. But I trust my approach to trading. But the type of play I recommend can be successful regardless of the market conditions.
Stocks go up, you could make money.
Stocks go down, you could make money.
It’s one in the same.
I’ve perfected a well-researched phenomenon that can outperform the stock market. It’s all based on “post-earnings drift.”
Let me explain…
Many individual investors make the mistake of trading actual earnings announcements. Now, this strategy can hand you quick gains if you get it right. But it’s impossible to do on a consistent basis. At least, I haven’t found anyone that can do it.
But there’s an anomaly that occurs after earnings announcements. I follow research that shows how a stock performs after it announces earnings. We’re not gambling on the actual announcement.
And it’s allowed me to find mispriced assets all over the stock market.
Here’s how it works…
Earnings Give Us a Way In
After the earnings announcement, a lot of things are in motion.
As we see the earnings results, the analyst community reacts, and investors react.
All of these reactions have a tendency to do one thing: fumble on pricing in the earnings potential.
And it’s the Wall Street analysts’ fault.
They are encouraged to have lower earnings estimates going into a quarter, to make it easier for the companies to beat the expectations. This is how analyst on Wall Street keep good relationships with corporate management.
But they are also slow to raise earnings estimates after strong results. It takes up to two months after the initial report for Wall Street to fully price in the new earnings.
As we often tell you in Winning Investor Daily, Wall Street doesn’t work for you. It works for itself. We, on the other hand, are not beholden to corporate partnerships or big banks. We work for you, our readers, to bring you big opportunities without strings attached.
We don’t need to get attached to earnings numbers. So we can show you how to beat Wall Street before it realizes its mistakes.
The delayed response to increased earnings creates an opportunity for us. We can capitalize on a mispriced stock.
Over the next 60 days, a stock that had strong earnings results and a rising share price experiences what’s known as post earnings drift — where the stock heads higher over the next two months.
During this period, we see what’s known as a classic positive feedback loop.
The earnings results trigger the event. Then the analysts upgrade the stock over the next several weeks, and this adds to the momentum. And then news sites pick up on it and begin promoting the positive upgrades.
All this helps push more investors into the stock over the 60 days following an earnings announcement.
The trick is spotting this setup right after the announcement, so you know when to jump in.
I incorporate this approach in my Quick Hit Profits strategy. You can learn all about it in this video my colleague Matt Badiali put together.
Chad Shoop, CMT
Editor, Quick Hit Profits