I want to review a common scenario investors come across as they wake up to their portfolio in the morning:
The Dow is up 250 points; it’s going to be a good day.
Stock A is up 1.5%. That was a good pick!
Stock B is up 2.3%. What a beast!
Stock C is down 10% and falling fast! What the heck???
It turns out stock C reported earnings above expectations, but investors are not happy. So, what happened?
And why is this stock going down when they had a good quarter above everyone’s expectations?
There are many reasons why a stock might go down after a solid earnings report. It could be profit taking, margins are weakening, competition, or maybe the CEO is leaving. But more often than not, computer-driven trading is forcing investors to sell when they don’t want to.
Some of the aggressive drops in stocks are scaring investors into selling, when they actually should be buying for the longer run. I’ve found that times in the aftermath of earnings seasons (like now!) bring us a multitude of opportunities.
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 will report how their business has done in the previous quarter. A company will report 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.
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 10-20% gains in a matter of months, weeks or even days!
More . . .
Is the Market Rigged?
How often have you owned a stock that gets pummeled with no logical explanation? This is often caused by computer-driven High-Frequency Traders HFTs). They fire off massive amounts of short trades to drive stock prices down, then profit from the rebound. Their gains come at the expense of human investors.
The good news is that Zacks has mounted a Counterstrike to catch the best of these Manipulated Price Drops as they rebound. That’s how we nailed recent gains of +58.1%, +32.4%, +26.6%, +33.6%, and even one for +28.7% in just 7 days.
Access to these trades must be limited. It closes to new investors Sunday, December 8.
See Counterstrike Stocks Now >>
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 its paramount 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
The end of earnings season presents investors with opportunities to take advantage of irrational moves whether the markets go higher or lower.
That is the mission of my portfolio, Zacks Counterstrike.
This Counterstrike strategy is designed to sniff out when High-Frequency Traders have manipulated a stock's price. We take advantage by buying the best of these unfairly beaten-down stocks. Then when price moves our way, we lock in gains and look for the next opportunity.
As I said earlier, the aftermath of earnings season creates a multitude of profit opportunities for nimble traders. Counterstrike looks to generate quick and consistent double-digit gains. In fact, we've recently closed gains such as +58.1%, +32.4%, +26.6%, +33.6%, and even one for +28.7% in just 7 days.
We're now holding a selection of stocks that are spring-coiled and ready to bounce higher.
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 Sunday, December 8.
See Counterstrike and 7 Best Stocks Now >>
Wishing you great financial success,
Jeremy Mullin has been a professional trader for more than 14 years with specific expertise in profiting from patterns set by High-Frequency Traders. He is the editor of Zacks Counterstrike.
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