Earnings Week: Approaches for Trading the “Beat”
Markets are surging today, with all major indexes producing notable gains at the time of this writing. Earnings beats from tech companies are injecting some bullish sentiment back into a market that was flagging earlier in the week. Facebook’s (NASDAQ:FB) earnings beat (which we covered here yesterday) is leading the way up, while good numbers from ADM (NYSE:AMD) are helping the sagging chip-manufacturing sector.
We continue to focus on earnings this week, taking a detailed look at how past data can provide a guide for profiting on future earnings announcements.
Today, we’ll be discussing some key strategic decisions for earnings-focused traders. You can read about the fundamentals of earnings-news trading in our totally free guide, which can be accessed using the button below:
Profiting on Earnings News
Market reactions to this week’s announcements for Alphabet (NASDAQ:GOOGL) and Facebook provide a useful illustration of some of the core challenges earnings-based traders need to tackle.
Alphabet posted an earnings beat and gained sharply in the immediate aftermath of its earnings announcement. It then proceeded to drop sharply, however. This subsequent drop has been reported not as an earnings-based selloff, but simply Alphabet getting caught in a broader bear market as creeping interest rates spooked investors. Cautious investors looking to reduce equity exposure may have used Alphabet’s earnings bump as a chance “sell the surge.”
Facebook, meanwhile, posted a nice Beat and surged far more than recent data predicted, over 9% on the day.
These reactions are a powerful reminder that, while earnings-based trading is one of the most consistently profitable approaches, the stock market is always an unpredictable place. News-based traders utilizing News Quantified have access to a vast dataset on the market’s reaction to earnings news. This information is vital not only for identifying significant earnings events in real-time but for planning your exit strategy on the trade.
Let’s consider two basic approaches.
First, you can sell at a pre-determined price point. This approach protects you from the downside risk of subsequent news events washing away the momentum from your earnings-news trade. For instance, prior to GOOGL’s earnings announcement on Tuesday, we observed that earnings beats from Alphabet rarely resulted in gains above 4.5%. A pre-planned sell at the 4% gain mark would have locked in some solid one-day profits while avoiding the subsequent selloff. This approach, however, can also limit potential upside. Exiting FB after it passed its average “Beat” gains of 3.3% would have still made for a profitable trade, but we would have missed out on a large portion of FB’s 9%+ gains so far.
Second, you can plan to sell after a certain period of time (1-day, 1 month, etc.). Most earnings-news trades utilize short hold times, but this system is also a powerful tool for longer-hold time investors looking for the perfect entry point. News Quantified offers data specifically calculated for a variety of hold times: this information is important for judging how long a stock typically takes to “absorb” earnings news. While mega-cap stocks like FB or GOOGL are likely to react quickly, microcap stocks are traded at much lower volumes and may take longer to re-value. With this data, you can plan accordingly. Subsequent news events in the timeframe, however, may create cross-currents that disrupt earnings-based momentum.
Neither approach is “better,” they both simply manage potential risks and rewards differently. You can even employ both approaches simultaneously, planning both a time-based and price-based exit point. Ultimately, this stands as another case where news-based trading isn’t so much a single strategy as a powerful tool for maximizing the returns of whatever strategy (and risk approach) you choose to employ.