Page 364 - THE MARKET WHISPERER

360 PART 10 - Winning Trades

Trading at Financial Reports
and Announcements

At the start of each quarter, public companies must report to the stock
exchange, investors, and to the public on the outcomes of the previous
quarter, together with their forecasts for the months ahead. Quarterly
earnings reports are typically publicized during April, July, October and
January, as soon as the quarter ends. Most companies issue their quarterly
reports before or after trading hours, although this is not a requirement.
As such, earnings reports will almost always cause a gap in the stock’s
price. The gap direction can never be known. Even if you have in-depth
financial knowhow and can analyze any company’s financial reports for
yourself, do not imagine even for one moment that you are able to predict
the gap direction. It can happen that great reports lead to equally great
drops, or vice versa. I have never yet met an economist who was surprised
by the stock’s direction following a quarterly report. That is odd, but in
retrospect, the explanation goes something like this: “Yes, outcomes were
excellent, but in clause […] of the balance sheet, the company informed of
its reduced expectations.” In short, the market is comprised of two kinds
of people: those who simply do not know, and those who have no idea that
they do not know. Nor do I ever know with any certainty which way the
price is going to move. So how do we nonetheless profit from quarterly
reports and announcements?

Company balances are detailed and contain a great deal of economic
and business data. For short-term traders, this data holds no interest, but
the short-term outcome on long-term investors interests us a great deal!

During the “earnings season,” institutional investors closely follow the
stocks in their portfolios, and decide whether to hold or dump them. Two
important, if not the most important, factors in the institutional investors’
decision-making processes when considering whether to increase or
decrease holdings of a specific stock, are:
• Forecasts by analysts reviewing the stock
• Analysts’ predictions on whether the company will increase profits and

revenues during the coming quarter