Sentiment - Earnings Events

Hi Folks and thanks for stopping by my blog.

I've been looking at the market moves associated with some companie's earnings. Some companies' reports and announcements, by analysts or company directors, can cause swings in risk sentiment effecting major indexes, sectors, even moving the value of the USD to effect the major dollar currencies.

There are, of course, many factors that effect price movement. There are also may factors that go into determining "expectations" of a company's earnings. Earnings Events are not about just the required company announcements every quarter. There are other events during the year that affect expectations. Analysts come out early with their expectations and ratings. The companies issue “earnings guidance,” which is management’s estimate of what the company will do in the future. Both are surrounded with controversy.

A company's earnings are, quite simply, its profits. Beyond all the financial formulas applied by an analyst to the company's statements, they are only trying to get down to a company's ability to make profits. When boiled down it is simply taking a company's revenue from selling something and subtracting all the costs to produce that product. This is then cut into earnings per share (EPS).

Analysts' Estinmates and Ratings

According to Wikipedia there are more than 740 analyst firms around the world. In these firms the staffs range from one person up to several hundred. The controversy comes from the fact that these firms usually have a close relationship with the companies they are analyzing and announcing their expections and ratings for. "Industry analysts deliver a combination of market research, competitive intelligence, and management consulting to their clients."

The estimates can range quite a bit from the analyzts who holds the compny as a client to groups that are watching a compasny for investment.

So, earnings "surprises" can be seen as a measure of analyst error. WhisperNumbers.com goes so far as to say: "An estimate is not an expectation, does not create volatility, and will not create opportunity". But estimating a company's earnings is not what this post is about. It's about preparing for the market's expectations around earnings events. The markets looks at earnings events with caution because of the uncertainty and the market can’t stand uncertainty - uncertaunty causes volitity and volatility increases risk.

The uncertainty comes from the known fact that analysts will remain positive on a stock for fear that if they get on a company's wrong side they will be cut off from management and information flows. Brokerage houses are inclined to be optimistic to encourage investor clients to buy into stocks. According to Mark Bradshaw of Harvard Business School, stock analysts are persistently optimistic in their forecasts of corporate clients that issue equity and debt.

From SeekingAlpha.com is an example in their article, "Anticipating Post-Earnings Price Moves":

The word 'analyst' implies that there is actual analysis being conducted. This appears far from the truth. Consider the following example: Best Buy Company (BBY) offered earnings guidance of 41 to 43 cents. This guidance was above the analyst's estimate of 40 cents per share. A survey conducted by WhisperNumber.com of individual investors indicated an expectation of 43 cents per share five days prior to the Best Buy announcement. This is where it gets confusing - within 24 hours those 'professional analysts' re-did their 'analysis' and came up with a re-tooled, re-worked, re-analyzed number of (you guessed it) 42 cents. Imagine the coincidence of the 're-analysis' and it coming in right at the mean of the company guided 41 to 43 cents? You, and other investors, are then provided with the meaningless analysts estimate.

Is there any doubt that when the analysts have financial relationships with a company their earnings estimates are manipulated in the company’s favor?

Earnings Guidance

Ken Little from About.com has an excellent article, "Understanding Earnings Season", explaining this. Here is an except on guidance:

Many companies also provide “earnings guidance,” which is management’s estimate of what the company will do in the future. There are rules and regulations about what they can say, but plenty of wiggle room that some in the industry say is too much and boarders on manipulation.

There is some controversy over earnings guidance. Some in the industry believe the practice of management offering a picture of how a company may perform in the future helpful.
Other industry professionals believe the practice allows management to use misleading information about future events to prop up stock prices. For example, a company president might indicate earning would be lower than they actually are, so when the numbers come in over the estimate, the stock price may rise.

“Whisper estimates” are another source of earnings estimates, although very unofficial. Some come from company insiders, while others come from a consensus of sophisticated investors. They claim to be unbiased; however, there is no way to know the source of many of the whisper numbers reported on the Internet, so use caution.

Additionally, a management estimate of the future activities of the company under consideration is also provided, which is often referred to as earnings guidelines. However, there are limits to what can be presented in the guidelines in order to avoid misrepresentation and manipulation of investors.

Many experts support the idea of issuing earnings guidelines since it allows investors to see what they can expect from the company. Additionally, it gives a view on the future performance of the company.

Opponents of earnings guidelines point out that this practice allows companies to manipulate the price of their stock. How is this done? The management of the company may present lower values for the future earnings of the company. As a result, after higher earnings are reached than the ones presented in the earnings guideline, the stock price will increase.

A somehow informal way of getting information about the earnings numbers is through the so called whisper estimates. The source of such estimations may be company insiders or a group of investors that has grouped together and agreed upon certain values. Often times it is hard to determine the source of the whisper estimates, so they represent a not very reliable way of determining the numbers.

Tips and Dirty Tricks

I've already posted about some fundamental factors for evaluating a stock , including some tactics used to make a report appear better than it really is. I'm going to add more of such tactics below.

Increasingly, companies will report bad news well ahead of earnings announcements. Management will try to get any unpleasant news out in the open so that there are no nasty surprises at report time. In fact, many companies now try to talk down expectations just enough so that there will be positive earnings surprise when results are announced.

"Talking down" expectations is getting so prevalent, it's arguable that positive earnings are having less of an impact on share prices. Big public companies, such as General Electric, Microsoft and Walmart regularly beat analysts' consensus estimates. Beating estimates by a penny or two no longer surprises the market.

While trying to manage earnings, companies have been known to reserve extra earnings in a good quarter to inflate earnings in a future bad quarter. Companies anxious to hit aggressive analyst expectations may try to inflate earnings through easing credit policies, or "stuffing" customers with more product than they need. Even worse, the need to meet or beat consensus estimates has prompted some companies to turn to illegal accounting practices. (For more insight, see Earnings Guidance: The Good, The Bad And Good Riddance.)

But, a very common "dirty trick" is to borrow money (sell bonds) and use that money to buy back stocks. This is used to boost their EPS and, at times, to grab profits in an internal carry trade manuver like when a dividend payout is due and has more profit than the interest paid on bonds sales.

And, buybacks reduce the assets on the balance sheet (cash is an asset). As a result, return on assets (ROA) actually increases because assets are reduced; return on equity (ROE) increases because there is less outstanding equity. The buyback also helps to improve the company’s price-earnings ratio Price-Earnings Ratio (P/E Ratio) Definition (P/E). [Investopedia]

Earnings Season

Earnings season happens four times per year; publicly traded companies in the U.S. are required by law to report their financial results on a quarterly basis. Most companies follow the calendar year for reporting, but they do have the option of reporting based on their own fiscal calendars Earnings season is a period of time where stocks are most volatile. And, to restate what I said above, volatility implies uncertainty, and uncertainty implies risk.

When companies deliver their quarterly results, investors are watching - not just for improvements, but also for how these results compare to analysts' estimates. If the company surprises the market with better-than-expected earnings, an upside surprise, the stock usually jumps. On the other hand, disappointing results, downside surprise, can cause the stock to tumble. And, there are times when a stock can tumble even though the results seem, on the surface, to be good. Just this past quarter, Microsoft, eBay, Johnson & Johnson, Yahoo!, and Hershey reported earnings that topped the analysts estimates. All companies, however, experienced negative price moves following those reports.

Alcoa kicks off the season and sets the tone for the next few weeks. Alcoa has long been used as a barometer for market performance. If Alcoa comes out bad, the next good events will be dampened. Everyone gets nervous ahead of Alcoa earnings because they tend to be pretty volatile, and the company has a tendency to come in weak.

But this quarter they were fine.

If you want to get a handle on the 'tone' for earnings season, then you must understand Alcoa.

Alcoa (AA)

Alcoa is the third largest producer of aluminum Aluminium in the world, behind Russia’s RUSAL and the U.K.’s Rio Tinto PLC (RTP), and is traditionally the first large company to report earnings each quarter. As a result, investors typically look to Alcoa to start off earnings season on a positive note.

The company's $5.2 billion in Q3 revenue was better than expectations, and $.09 EPS surpassed estimates of $.06.


Companies in many industries, including the aerospace, automotive, beverage, commercial construction, and gas sectors, use aluminum produced by Alcoa and, thus, demand for its products is a good gauge of the performance of companies in those businesses. As a result, a strong earnings performance by Alcoa is considered a bullish signal for the stock market overall.


Sector/Industry Movers

Bellwether stocks are generally viewed as an indicator of overall market or sector direction. The term bellwether itself is used to describe a company that is recognized as the leader in its industry. Since bellwether stocks are perceived as indicators of market trends, when a bellwether stock goes up or down in price, the entire sector of this stock may move in the same direction.

A headline this quarter: "Cisco (CSCO) Tanks Taking Stocks And Investors Down"

Some companies that can be considered bellwethers include:

• Exxon Mobil (XOM): the largest company in the U.S. by market capitalization and the largest energy company in the world.
• Microsoft (MSFT): the world’s largest computer software maker.
• Apple (AAPL): the world’s largest manufacturer of consumer electronics.
• General Electric (GE): was once the largest company in the U.S. and is still a powerhouse with its large size and participation in a variety of markets.
• Wal-Mart Stores (WMT): the world’s largest retailer and an important barometer of consumer sentiment.
• Berkshire Hathaway (BRK/A): the largest investment manager in the U.S. and an important player in the property and casualty insurance market. Many view moves made by Berkshire’s Chairman and CEO Warren Buffett as important market indicators.
• Proctor & Gamble (PG): the U.S.’s largest manufacturer of household products.
• Bank of America (BAC): the largest bank in the United States.
• Wells Fargo (WFC): a close second to Bank of America in terms of market capitalization.
• JPMorgan Chase (JPM): one of the largest financial services companies in the U.S.
• Johnson & Johnson (JNJ): the largest maker of healthcare products in the U.S.
• International Business Machines (IBM): an important provider of business and technology services.
• Google (GOOG): the largest player in the Internet industry and the operator of the world’s most used search engine.
• Cisco Systems (CSCO): the leading supplier of networking products for computer systems.
• AT&T (T): the leading provider of telecommunications services in the United States.
• Pfizer (PFE): a major producer of pharmaceuticals.
• Intel (INTC): a leading manufacturer of integrated circuits for the computing and communications industries.
• Coca-Cola (KO): the world’s largest beverage company.

Some links for more sector and industry info:

Hoover's D&B Company Directory


Morningstar's Free Quickrank
Find leaders in our stock or mutual fund universes. Also use our new ETF Valuation Quickrank to find undervalued ETFs.

And Compare
See how different stocks or mutual funds stack up against one another by comparing them based on various data points.

Harry Domash describes Picking the Industry Leaders

At IncredibleCharts.com use the Stock Screener to compare the relative performance of all stocks and to identify the industry sectors that show the best relative performance.

ETF Screener
ETFdb's proprietary categorization system allows investors to slice and dice the ETF universe by dozens of criteria, including sector, region, historical performance, and expense ratio - even Currencies.

Basic Strategies:

People don't have to think it over much to dump a security, but they will think long and hard about buying one. So a bad report causes an instant and big drop, whereas a good report moves up more gradually. So, in general:

Research companies with solid fundamentals. Even if they miss projections, estimates, or forecasts, pick them up when the market does not want them. It may appear counterintuitive, but it fits along the lines of Buffett’s “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”. Earnings season and the accompanying reports describing a company’s performance in the latest quarter say little in regards to a company’s outlook. If you strongly believe in a company’s future growth, why not pick it up at a discount?

Follow stocks that regularly trade strong volume. If the volume isn’t there, the market hasn’t any interest in the company. Stocks trading insignificant volume become a great hazard to investors during earnings seasons. While volatility may be present in this type of market, lack of volume or liquidity will keep traders away. Because Investors and traders are more likely to speculate in a liquid market, picking liquid stocks can significantly reduce capital risk and leverage upside potential.

Knowing how a stock's price will move following an earnings report will help you make better trades. Some companies will see the best price movement or price 'reaction' within one trading day.

Some more ideas from WhisperNumber.com:

A. Daily Investor Sentiment - Positive
If expectations for quarterly earnings are exceeded, the investor feels 'confident' and 'secure' with their investment. The company is rewarded for exceeding expectations with the result being an increase in stock price on a short-term basis. Our data is proven to be a reliable, prescient, and accurate indicator of this type of stock movement.

B. Daily Investor Sentiment - Negative
If expectations for quarterly earnings are not met, the investor is disappointed and insecure with their investment. This results in a decrease in stock price on a short-term basis. Our data is proven to be a reliable, prescient and accurate indicator of this type of stock movement.

I. Surprise Versus Expectation - Positive
Regulation FD (Fair Disclosure) has had a significant impact on the information now available to the demographic we monitor. The open announcements, and in many cases guidance, now being made by companies (both positive and negative) allow this demographic the access to more timely information affecting their investments. A positive announcement can have an impact on the expectation of the market (thus increasing the whisper number). Open guidance such as this could lead to limited upside movement once actual earnings are announced (in other words the stock movement is already built in prior to the actual announcement.)

J. Surprise Versus Expectation - Negative
Surprise information can be found in announcements, Regulation FD, earnings warnings, etc. All can lead to surprise information being placed into the market. Was this information already predicted in the whisper data? Or brand new to the market indicating even lower expectations pushing decline in price?

Overall Market Direction
A rising tide lifts all ships, and vice versa. Based on this logic, try to avoid buying into or selling a position when the stock market as a whole is trading against you. The fact is that you could invest in the best company in the world with the greatest earnings potential ever seen. But unless stocks in general are being accumulated by the investing public that stock may be stuck in neutral.

Then again, there is the Wyckoffian VSA method on economic events that can be used with earnings events.

On Wall Street, there is an old saying that applies to virtually any situation when it comes to buying or selling a stock: Let the trend be your friend.

The market was oversold coming in to today's action on those shorter-term 60-minute charts. The market almost always rallies at the first taste of oversold, but not always so quickly on these 60-minute charts. It was quick this time. A lot of unwinding took place with today's action thus things are set up to fall IF we get bad earnings over the next two days from the stocks mentioned above. On the other hand, we're not overbought and thus good earnings could take this market through the 1080 pivot and carry us back to the top near 1100. The market rallied up and fell back only to come on strong again as they wore on. We finished up for the day and now we need to see what the next two days give us. Things are neutral on the oscillators, thus both sides have the room to make the move through their critical pivots. With this market being in the middle of nowhere, it's important not to play too hard either way. Today set us up for either side to take advantage, but in the end it still leaves us pretty much nowhere. Let's see what the next two days bring us.
[By Jack Steiman of SwingTradeOnline.com]


Trying to scalp economic or earnings events can be hardous to your income, because underlying factors can make a seemingly good report have negative results and vice versa. But if you're in the market, you should keep a wary eye toward events that seemingly have little or no relavance with you trading as they can cause sudden and violent swings - even global reprecussions.

Next is a post on market indicators, then some on sentiment charts (Kagi, Renko, Point and Fiqure, but probably not Three-Line Break.)

When this sentiment section is done I'll be on hiatus for a while to catch up on some study especially some courses I bought. One is Lance Beggs "Price Action Trader" and the other is Wyckoff's Course. When done, I'll be getting into money management and possibly updating the calculator and analyzer software as I go.