April 16, 2007

In this week's free newsletter, we'll discuss an important topic this time of year:  What to Avoid During Earnings Season.

With earnings season kicking off in grand fashion this week, it becomes time to pay much closer attention to the stocks which I'm not only holding, but also those which are on my watch list for potential trades.

I keep a close eye on the earnings calendars at EarningsWhispers.com and MarketWatch.com, which you may want to bookmark as handy sites to check prior to initiating trades.

Avoiding the News

Of course it's one of my trading rules to avoid scheduled news, and earnings announcements are the most common scheduled events for an individual stock which can have a big immediate impact on price.  I don't trade based on information, but rather on price action and chart patterns.  Because this is the case, it leaves me with absolutely no edge trying to game an earnings announcement.

Will XYZ Inc. miss their earnings?  Will they beat?  Will they guide higher going forward?  Will there be a revenue shortfall?  How much is currently priced into the stock already in anticipation?  Honestly, I have no clue!  Even more importantly, I don't know how the market is going to respond to the announcement, so my best bet is to avoid it completely.

Avoiding the Group

Aside from not being in a stock when they report earnings, I've found it helpful to avoid others in the same group when a big name is reporting.  An example would be YHOO and GOOG.  They are in the same business (internet search engines), and paid advertising makes up a tremendous percentage of their revenue.  So if one of them is scheduled to report, I don't want to own the other, because a comment about their business environment is likely to impact both stocks the same way.  That means it's too easy to get caught on the wrong side of the trade merely through a sympathy move, which is another coin-toss bet I'm unwilling to take.

The point is that even though stocks in similar industries may not move closely together all the time, earnings announcements can contain fundamental information which can have a major impact on the way that industry will be viewed for a little while.

Avoiding the Gamble

I talk a lot about following a game plan in trading and reducing risk whenever possible, and I believe that no matter which stocks or timeframe or method you employ for your trading, you'll be better off avoiding scheduled events than trying to play the coin-toss game and hope that you're right.

If you're looking for some trading ideas to add to your own, you're in the right place!  Every week, we give our members an average of a dozen trade ideas with specific entry and exit levels, along with an explanation of why they are trade candidates.  We don't make bold predictions or gamble on earnings.  We just knock out consistent trades with small losses and big gains (like the TSL trade we closed out today for 25% in 8 days)!

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Jeff White
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