Yup, you read that correctly. Playing the earnings guessing game is a time honored tradition on Wall Street where the best and the brightest, along with the worst and the dumbest, try to pull together all the recent economic data, industry news, upgrades and downgrades, channel checks, etc. in an attempt to somehow profit from the upcoming earnings season. Some are guided by algorithms, analyst
s, or interns while others try to get their hands on insider information, while most just dig through too many files and put in too many hours of research trying to find the answer to that one burning question: will the company beat, match or miss expectations?
Over the next few weeks, you’ll be innundated with articles by so-called experts and talking heads galore as they explain the various methods they’ve used to draw their conclusions and many of you will act upon their advice. Some of you will make money, excited to come out on top while others will lose, cursing outloud at your need to gamble at all.
After this post, you won’t hear me talking about this subject again because I’d rather lose a limb than play the earnings guessing game.
While losing a limb would certainly be painful and life altering, it’d be over quickly (ideally) and I could then move on to seek out the best doctors and prosthetics to handle this tragic turn of events. But it’d still be better than trying to guess earnings because the earnings guessing game never ends, it just keeps going and going…repeating quarterly. No matter who’s right or wrong this time around, they’ll probably be wrong or right next quarter or the quarter after so everybody goes around and around and there is no end in sight. Sure, there’s money to be made and lost, but the game never ends. The only way out is to go cold turkey and not participate at all. And that is my choice. I’m pro-choice.
Don’t get me wrong, I look forward to earnings season, I just view it differently than most. You see over the past decade, I’ve found the chances of success increase dramatically if I sit back and let all the guessing play out–avoiding taking sides, one way or the other. The key is to buy the biggest earnings winners and short sell the biggest earnings losers early in the day–watch out for opening spikes–after earnings. Sure, you give up the overnight and pre-market moves, but you take away a lot of the risk involved. For smallcaps in particular, this is a very simple strategy that has worked extremely well for me–but definitely not all the time–because Wall Street is slow to react as everybody is too busy rethinking the bias they created while they were playing the Wall Street earnings guessing game!
Sounds too good to be true, right? Take look at the charts below:
LOGI (big earnings gainer)
PLCM (big earnings gainer)
TGIC (big earnings loser)
AVCI (big earnings loser)
As you can see the intraday price action isn’t very volatile, but the earnings report from the night before–good or bad–sets a clear trend, a trend that usually lasts for one or two days, sometimes even weeks.
Disclosure: Timothy Sykes has no positions and these stocks are smallcaps so they’re risky blah blah blah