How I Trade Earnings…I Don’t

It’s that special time of the year again that comes along every ninety days. As always, we kick earnings season  off with Alcoa, which will report after the close on Monday. Some other notable names that will report his week will be JP Morgan $JPM on Thursday and Citigroup  $C on Friday.

It seems that my success in trading is in the period in between earnings reports, it is then that I trade the trend of the market, long if we are trending higher and perhaps a little bit short if we are correcting. The tape is easier for me to figure out that way, and I am not subject to the violent swings that result from an earnings report.

So what do I try and do? First of all, I trade much smaller. I don’t have to be fully long all the time. Cash positions are cool during reporting season. I know some brokerage firms and some pundits will tell you to “get long in front of the earnings report”. That’s fine for them, I can’t play that game. I am a trading “purist” and I liken making big bets on a stock the day before a report to riverboat gambling. To me it’s more of a guess and we all know the track record of most analysts.

For every plus twenty point move in a First Solar $FSLR off a good report, I have seen an equal amount of tragedies in the after market as a result of a disappointing number. I may hold a position if I am long into a report for two reasons. The first reason would be if I am long and already comfortably profitable, meaning I have a “cushion” in the name. The second reason I would hold is if I am small in the name. If I am long and positive, I will reduce by half (at least) before the report. Capital preservation is job one and if a miss a big move up, so be it, stocks are like taxis, another one will come along in five minutes.

There is no right or wrong way to trade earnings I guess, but this is my way. There are hedge funds and algos that love this time of year because unlike me they thrive during this period, but that is their strategy and they do it better than I ever could. I am just saying if your the regular guy, use caution during this period, especially if you are positive in a name, you can reduce the position or protect it with some options. Blindly buying because an analyst tells you to can be suicide. You can always revisit the name when the dust settles.

Have a great week trading and good luck out there. Debt ceiling chatter and Europe are still front page news, so when you throw earnings in the mix it could make for a volatile week.



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