Actionable insights straight to your inbox

Equities logo

3 Keys to Trading Earnings

The several weeks that make up earnings season in the stock market is one of the most active periods for traders and investors. Major earnings surprises or misses can often times create huge price

The several weeks that make up earnings season in the stock market is one of the most active periods for traders and investors. Major earnings surprises or misses can often times create huge price movements that translate to equally large gains and losses on trades. First quarter earnings and outlook will also carry more weight as uncertainty of the broader market direction and economic recovery faces some strong challenges, and the recent bull run could be at risk of cooling down.

So with companies already starting to report their Q1 results, we asked Toni Turner of TrendStar Trading Group for some tips and insight on how traders and investors should proceed with their strategies.

EQ: Earnings season for the first quarter has started, and by most accounts, this period could have significant implications on the market’s direction. What are you watching for as companies report their results in the coming weeks?

Turner: Typically, first quarter earnings seasons can be very volatile, and this one especially could be because of the move up that we’ve had. As we know, earnings results are compared to the same period from a year ago as a measure of performance. Earnings for the first quarter of 2011 were fantastic, but expectations are much lower this time around. After all, they were coming off pretty low levels from the prior years during the bear market. I don’t know that we can repeat those earnings and do better with them consistently across the board for the big companies that are reporting in this particular earnings season. Plus, we’ve had a big run-up in the market since at least the middle of December. We’ve had an absolutely beautiful run in the S&P 500, Dow Jones Industrial Average, and Nasdaq. To continue that move higher, we would need to see higher highs, and that may be asking a lot of this market considering the headwinds that we have going into the final spring months and into the summer. I would suggest to anyone who’s currently trading or investing to maintain an overall awareness of what’s going on in the market and understand that earnings, especially from the ‘800-pound gorillas’ in the Tech sector, can add a big wallop either to the positive or to the negative side. Expect volatility and price swings because that’s typically the way it goes for the next three weeks.

EQ: You’ve always said that it’s important for traders to stay nimble in the market. With the expected volatility and price swings that you mentioned above, that advice holds especially true now right?

Turner: In Toni’s Market Club, we generally advise that if you’re trading in a short time frame, then you should not hold positions through earnings, or at least only hold small share sizes. I’ve seen it over and over, and you cannot afford to establish a bias and become attached to a stock in the short term, because the bulls and the bears are going to duke it out here for the next three weeks. As I said earlier, we’ve enjoyed a beautiful run-up from the middle of December and on, but now it’s showing signs of needing a correction. As the Japanese say, don’t test the depth of the water with both feet. Or, it may be wise to limit position size right now. You need to be nimble and keep a totally neutral mindset when you’re trading in these markets.

EQ: Obviously, profit and revenue figures for the previous quarter is important to focus on, but why should investors and traders also pay attention to guidance?

Turner: I recommend that traders keep a running commentary and take notes on what the big companies are saying about guidance when they issue earnings. Guidance can give you an idea of how we’re going to move through the spring and summer, and even into the fall. After all, the stock market is a forward-looking entity and we buy stocks based on our perception of the future. So when the big companies in Tech, Industrials and Conglomerates report and issue forward guidance, it’s very important to pay attention and take notes if possible, to understand what the general opinion is on the future prospects for the coming quarters and remainder of the year.

Amid regulatory scrutiny, high volatility and a steep decline in crypto's credibility, is a Bitcoin boom cycle possible?