What Is An Earnings Run?

We often get a chance to put dollars in our accounts by looking for "earnings runs". What are they and why do they work? Well, the bottom line is that the market still runs on fear and greed. Earnings season brings out both.

The concept is really pretty simple. When earnings reporting season approaches, we get a lot of traders who get excited about what they "might" hear, so they start buying into the hope. If a stock hasn’t come out to warn or preannounce any bad news, it gets really interesting as traders almost fall over themselves to get a piece of the action. So, just about 10 days before actual earnings start flooding the airwaves, we generally see stocks start inching higher.

But what happens when they actually report? More times than not the stock gets a smackdown, even if it’s just temporary. Why would that be? Well the report is never as glowing as people want it to be. Even if a company beats their numbers they rarely do by a measure that gets everyone excited. Then of course there is the conference call to deal with. Remember earnings are posted for the quarter that just ended. Like yesterday’s news. Traders want to know what’s coming down the pike now.

We have watched earnings seasons for many years now. Almost every time, we get a lift into them and then we get a pullback when they are about done with as everyone looks around and says "that’s it?" The most important thing we can tell you is do not hold a stock over its earnings report. Yes, you might miss a big gap open the next day and yes, you may be locked out when a stock gets upgrade after upgrade. We know. It’s called "missed money".

But we have all seen the effects of a bad earnings report or a cautious outlook for the future. It’s not uncommon for a stock that ends a day at 50 to open at 40 the next day on a poor report. Is the risk/reward worth that kind of pounding? Not on your life. In fact, the last time we did a comparison study, almost 74% of all the stocks that reported earnings sunk, even if they beat the estimates. That is a number we simply cannot ignore. So, yes it stinks when you miss a big spike, but it stinks considerably less than being down 12 bucks in a stock that got beaten!

Larry Potter is a recognized authority on the subject of trading and has been publishing his newsletter, Stocks2Watch®, since January of 1998. For a 2-week trial and a 8-part FREE report on Technical Analysis in easy to understand language, click here