This $100M Earnings Heist Has an Unusual Lesson
Back in 2013, two Ukrainian hackers pulled off a heist that would lead to over $100 million in illegal profits.What was their target? Earnings season. They infiltrated several market news organizations, accessing over 100,000 earnings reports before they were released. Then, they sold the info to traders using an overseas server. The traders would take the info, take positions on the sure bets, and rake in the money. Sorry for them, they didn’t quite get away with it. 32 individuals were charged in 2015. The ringleaders did several years in jail, and paid back over $3 million in restitution. They knew prison was a risk of their strategy. But the culprits thought it was otherwise foolproof. Except that wasn’t quite the case…
Now, I won’t pretend that $100 million isn’t a sizeable return. But with a bona fide cheat sheet to earnings, you’d expect these traders to have made much more.There were actually a few trades where they lost money. And, only 31% of the trades they placed were in stocks with the biggest responses to earnings announcements. They may have won on the majority of their trades, but they missed some of the biggest gains in the market — and faced federal prosecutors. Fortunately, we don’t need to risk prison time to trade earnings… The strategy I’d like to show you today is perfectly legal, and probably even more lucrative…
An Overlooked Strategy for Next Week’s Earnings
This earnings strategy is based on the “strong form of the efficient market hypothesis,” which I’ve written about before.It states that a stock’s current price is based on all the information available about the company. New information is immediately incorporated into the stock price. This explains why stocks often gap on earnings. The earnings announcement is usually released after the market closes or before it opens. Traders read the news and react when trading begins. Because they have new information, the price instantly changes to reflect that and we see a gap on the open, an area where no trading occurred. After that initial change, analysts review earnings and talk to management for additional information. Based on what they learn, they revise their earnings models and issue new estimates or price targets. This process takes time. As it unfolds, the stock tends to drift in the direction of the initial gap. So if the stock jumped on the news, it tends to continue rising. If it gapped down, the decline often continues. There’s an obvious profit opportunity here: Jump into stocks that experience an initial gain after earnings. If that group of hackers understood this, they probably would’ve done much better and not drawn as much attention. Of course, like any phenomenon, there are exceptions. That’s why Chad combed through 15 years of data to narrow the entire stock market down to 75 tickers that tend to experience this “earnings drift.”He’s reopened access to this confidential list for a limited time. You’ll want to see it before earnings season begins in earnest next week. Regards, Michael Carr, CMT, CFTe Editor, One Trade
Chart of the Day:IWM Stuck in the Doghouse?
By Mike Merson, Managing Editor, True Options Masters
If you like frustrating price action, you better love small-cap stocks.The Russell 2000 spent virtually all of 2021 in a 240-point range. Up and down, up and down… BREAKOUT… wait, no, fakeout. To rub salt in the wound, in 2022 small caps have exited this sideways action to the downside. And now, they seem to be forming a newer, lower, tighter range between 1932 and the previous bottom, 2125. Chad Shoop and Amber Hestla both planted a flag in small caps as their pick to outperform the market in 2022. So far all but the Nasdaq 100 tech index has outperformed them. If there’s one piece of encouraging news, it’s that small caps are deeply oversold right now on the Stochastic RSI — just as the index forms a higher low. If the broad market is going to bounce and continue higher here, you can bank on small caps following suit. Play them for a breakout of the new range, but also expect resistance when we get to the top yellow line at around 2350. Regards, Mike Merson Managing Editor, True Options Masters