possible trading strategy?
 

stock market goes up historically
companies go up after releasing their earnings historically
therefore, buy companies a day before they release their earnings and sell the next day. keep doing this over and over again and you should out perform the S+P? correct?

Re: possible trading strategy?
 

Even if this is true, you will likely experience much higher volatility, and significant transaction costs (if you plan to buy/sell after every earnings). Any deviation from expected earnings often results in large swings, and losses of 5-10% are not uncommon.

I wouldn't do it, just my gut feeling.

Re: possible trading strategy?
 

This sounds relatively easy to backtest. Have you tested your idea on historical data?

Re: possible trading strategy?
 

no. i dont have the means or the desire to, but it would make sense for stocks to make most of their losses or gains directly after earnings. essentially the other 361 days of the year (minus weekends) are speculations based on the next earnings and the last earnings date.

Re: possible trading strategy?
 

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keep doing this over and over again and you should out perform the S+P? correct?

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Nope. Been studied extensively in the finance literature, and except for some particular subsets (Piotroski stocks, for example), there's nothing there.

Re: possible trading strategy?
 

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no. i dont have the means or the desire to, but it would make sense for stocks to make most of their losses or gains directly after earnings. essentially the other 361 days of the year (minus weekends) are speculations based on the next earnings and the last earnings date.

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If this were your belief then testing it is the only thing you can do (unless it's been done). You could use OCO orders the day before earnings day. If a large move comes then you can ride the wave (up or down) once it starts by being stopped in in the right direction and your 'hedged' order is cancelled.

Whipsaws, retracements, gaps, and slippage etc. would play a huge part in whether you can turn a profit or not - hence the need for diligent testing.

Re: possible trading strategy?
 

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keep doing this over and over again and you should out perform the S+P? correct?

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Nope. Been studied extensively in the finance literature, and except for some particular subsets (Piotroski stocks, for example), there's nothing there.

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Seeking Alpha has a few articles on this subject.

Re: possible trading strategy?
 

[ QUOTE ]
stock market goes up historically
companies go up after releasing their earnings historically
therefore, buy companies a day before they release their earnings and sell the next day. keep doing this over and over again and you should out perform the S+P? correct?

[/ QUOTE ]

Did you see CROX today after hours?

Re: possible trading strategy?
 

You might reconstruct your theory as follows:

During the period where most companies release earnings, the market is historically more volatile.

The stocks of individual companies also tend to be more volatile around their earnings release.

Therefore buy the volatility of stocks before they release their earnings (using a option straddle, for instance) and sell the position the next day.

Keep doing this over and over and you should outperform the S&P 500???

My experience tells me that the answer to this question is: no, it is unlikely that you will outperform even treasury notes using this strategy when accounting for transaction costs and slippage.

In fact I would not be surprised to learn that selling volatility ahead of a earnings release outperforms buying volatility -- particularly for widely owned companies with a significant deviation in earnings expectations among a population of credible analysts.

Re: possible trading strategy?
 

From my own observations, stocks tend to go down more on a bad earnings report than they go up on a good one. I've seen stocks take 25% hits when they're earnings are deemed poor; on the upside, it's more like 10%.

At some point, you're gonna take some serious body blows.

Re: possible trading strategy?
 

then do the opposite and short everything before earnings.

Re: possible trading strategy?
 

[ QUOTE ]
stock market goes up historically
companies go up after releasing their earnings historically
therefore, buy companies a day before they release their earnings and sell the next day. keep doing this over and over again and you should out perform the S+P? correct?

[/ QUOTE ]

Nope, because large firms love to wait for good earnings periods to allow them to dump a huge position with little/no slippage because all you earnings momentum players are jumping on board.

In short, there's people thinking the opposite to you with bigger positions, with technical thinking thats far beyond your comprehension. They're strategic, they have objectives, and they're ruthless. And they'll always exploit simple strategies like this one.

Re: possible trading strategy?
 

a stock i bought gave their earnings this morning. i was able to sell at 53.2, now its at 50.58 after an under performing report. is it possible to wake up every morning and short a stock based on its earning report before everyone else gets there?

there has to be some strategy in the stock market that makes you easy money if you have a big enough bankroll to offset fees.

Re: possible trading strategy?
 

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a stock i bought gave their earnings this morning. i was able to sell at 53.2, now its at 50.58 after an under performing report. is it possible to wake up every morning and short a stock based on its earning report before everyone else gets there?


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Somebody has to buy for you to sell - it's not like there's some dummy standing there offering to buy stocks regardless of what happens to the earnings.

Re: possible trading strategy?
 

I'm sure that you could do something like this for companies in the S&P 500 because so many stocks are changing hands based on index funds that you can play against that with individual companies. (in fact I know some hedge funds do this but I don't know their exact schemes)

Re: possible trading strategy?
 

this worked for a while in the past. Wall St used to habitually underforecast earnings. In the late 90's when the internet came about, a bunch of sites rose up that gave extremely accurate earnings predictions. Owners of the sites later fessed up that all they were doing was taking wall st forecasts and revising them upwards X percent every time.

Long story short, no, you cant generate alpha by doing this strategy (and if you could in theory it would immediately go away)

Re: possible trading strategy?
 

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a stock i bought gave their earnings this morning. i was able to sell at 53.2, now its at 50.58 after an under performing report. is it possible to wake up every morning and short a stock based on its earning report before everyone else gets there?

No. If you look at the futures market for the S&P for example...that trades overnight. The market opened down around 20 points this morning but the futures had already been trading down to that point since last night

there has to be some strategy in the stock market that makes you easy money if you have a big enough bankroll to offset fees.

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Re: possible trading strategy?
 

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I'm sure that you could do something like this for companies in the S&P 500 because so many stocks are changing hands based on index funds that you can play against that with individual companies. (in fact I know some hedge funds do this but I don't know their exact schemes)

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Why do you think prices won't move immediately after something blatantly as obvious as earnings? Index funds are, as a rule, price takers and you can't play against that, unless you're a market maker and no one else is willing to make markets. The way to play this is stat arb, but everyone's doing that too. The only fundamental way to make money off earnings is by understanding the announcement better than others.

Re: possible trading strategy?
 

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a stock i bought gave their earnings this morning. i was able to sell at 53.2, now its at 50.58 after an under performing report. is it possible to wake up every morning and short a stock based on its earning report before everyone else gets there?

there has to be some strategy in the stock market that makes you easy money if you have a big enough bankroll to offset fees.

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And what if a large player takes this opportunity in the morning to execute a large buy order, with a long term holding idea in mind? Unless you time your exit to perfect, all your profits will gone, and suddenly now the momentum players are getting involved, giving you a loss.

Re: possible trading strategy?
 

Something I read recently is somewhat related to this, and interested me a great deal. It's called the disposition effect - here's a link if you are as intrigued by group psych as I am. It describes investors' tendency to sell appreciated securities quicker and to hold onto losers longer, otherwise known as "get back to even-itis".

The original paper (which I am too lazy to find now) demonstrated an abnormal rate of return is achievable by buying stocks that have a positive earnings surprise and substantial pre-release appreciation. Conversely, they sold stocks after negative earnings surprise that have substantial pre-release depreciation.

Now, this study was done a while ago and extensively covered by the markets, so I expect most of it to not work very well anymore... but this is human psychology we're talking about, and there must be inefficiencies everywhere related to this phenomenon.

Anyone tailor a strategy around this, or a variation?

Oh, and if you have any other group psych related papers, send em over, these kinds of research papers I read for fun.

Re: possible trading strategy?
 

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Oh, and if you have any other group psych related papers, send em over, these kinds of research papers I read for fun.

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You might find The Socionomics Institute interesting. Also, Robert Prechter's work on the Elliot Wave and Fibonacci principles is interesting, but (IMO) difficult to apply. He recently co-authored an article in The Journal of Behavioural Finance

Re: possible trading strategy?
 

[ QUOTE ]
Something I read recently is somewhat related to this, and interested me a great deal. It's called the disposition effect - here's a link if you are as intrigued by group psych as I am. It describes investors' tendency to sell appreciated securities quicker and to hold onto losers longer, otherwise known as "get back to even-itis".

The original paper (which I am too lazy to find now) demonstrated an abnormal rate of return is achievable by buying stocks that have a positive earnings surprise and substantial pre-release appreciation. Conversely, they sold stocks after negative earnings surprise that have substantial pre-release depreciation.

Now, this study was done a while ago and extensively covered by the markets, so I expect most of it to not work very well anymore... but this is human psychology we're talking about, and there must be inefficiencies everywhere related to this phenomenon.

Anyone tailor a strategy around this, or a variation?

Oh, and if you have any other group psych related papers, send em over, these kinds of research papers I read for fun.

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Retail investors that trade on news make up such a small portion of the market, I think the system sucks.

Re: possible trading strategy?
 

IIRC, the research paper found the effect among most pro money managers too... Although you would assume they would be trained against this sort of thing, they are subject to the same failings as the retail guys.

Either way, the study measured real rates of return, and it produced significant gains at the time of the test, so it worked then.

Re: possible trading strategy?
 

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IIRC, the research paper found the effect among most pro money managers too... Although you would assume they would be trained against this sort of thing, they are subject to the same failings as the retail guys.

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Money managers are concerned about something different though. I'll give you a hint: the end of the quarter creates weirdness.

Re: possible trading strategy?
 

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Money managers are concerned about something different though. I'll give you a hint: the end of the quarter creates weirdness.


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Praise the Lord and pass the amunition!! I love this trait of the Mutual Fund managers. Used it on Halloween to sell off some stocks at a profit and am getting back into two of them today.

Jimbo

Re: possible trading strategy?
 

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You might find The Socionomics Institute interesting.

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I've worked on some papers with Prechter, Dan Gough, Wayne Parker, et al at the Socionomics Insitute, and I can tell you for sure that they're bright guys and very dedicated. I'm a bit of an EMT guy and tend to disagree with many of their viewpoints insofar as they explain market behavior... but alot of their working papers are *very* interesting.