Are You Prepared for Volatility Season?
On July 8, we kicked off what might as well be called “volatility season,” when Alcoa (NYSE: AA) delivered the first Q2 earnings report.
While geopolitical events have dominated headlines, earnings are the true driver of stocks. And I have good reason to believe a lot of companies are going to report lackluster earnings. For the next few weeks, we’re likely to see one-day stock moves of 5% to 10%-plus more frequently. This can result in quick losses or gains — depending on how you’re positioned.
If you could accurately predict whether a company will beat or miss earnings estimates before its quarterly report, then you could profit from the post-report move.
Over the years, I’ve developed a proprietary earnings algorithm that helps me do just that.
With it, I have been able to predict — with good odds — whether a company’s earnings will beat or miss the consensus. From January 2012 to February 2014, I used this system to generate a total return of 424.5%, trading only stocks.
My System for Accurately Picking Earnings Surprises
Investors often take analyst recommendations — whether we should buy, sell or hold — at face value. But in the past 18 years, I’ve learned that there are overlooked details to these reports that tell a much different story. If you know what to look for, these details can spell big opportunity.
What makes my system different is that I analyze the analysts. Rather than sift through thousands of pages of data myself, I let the analysts do the work and then examine their actions leading up to earnings season.
Specifically, I’m looking at four things:
1. Who the analysts are — have their previous predictions been accurate?
2. Research updates — what’s new?
3. Changes in the consensus estimate — how large and how frequent?
4. Timeliness of analyst changes — when are their changes being made?
My system essentially looks for patterns of bullishness or bearishness from the most accurate analysts and takes into account just how dramatic their shifts in sentiment are.
For example, if an analyst with a strong track record of good calls lowers his earnings estimate by 20% below the consensus just days ahead of a report, you can bet he’s got a darn good reason. If other analysts are doing the same, even in subtle ways, they likely have information that’s going to impact the earnings report. That’s a warning I want to heed.
I have four main “tells” I look for when I’m analyzing the analysts, and each is critical to my earnings algorithm.
Basically, I figure out the “tells” of good analysts… compare them against a series of technical indicators… and figure out which companies are likely to beat or miss earnings.
Of course, it wouldn’t be prudent for me to share the specific “tells” and indicators. If I did, a lot of people would start using my algorithm and it would become less effective.
But I can show you the stocks my algorithm flags. That’s what’s really important.
For instance, in April, my earnings algorithm predicted Yelp’s (NYSE: YELP) report would be a disaster, yet the stock was trading at a sky-high valuation. Sure enough, the company reported first-quarter sales that fell well short of expectations and shares plummeted.
Casino operator Wynn Resorts (NASDAQ: WYNN) is another example. When I ran it through my earnings algorithm in June, all of its readings were negative. Not only was it flashing all four “tells” I look for, but my technical indicators were extremely bearish as well.
The company is still a week or so out from reporting its earnings, but shortly after my earnings algorithm flagged it as a dud, shares started dropping like a rock.
My system has also accurately predicted earnings-related moves in Keurig Green Mountain (NASDAQ: GMCR), Amazon (NASDAQ: AMZN) and hundreds of other stocks.
As I mentioned, earnings surprises offer the chance to make huge profits in a short amount of time. Readers who heeded my call on YELP made 40% in 29 days, or 509% annualized. And those who listened to my WYNN warning netted 30% in just nine days for an amazing 1,234% annualized.
As Q2 earnings season gets into full swing, I plan to make many more trades like this. And there is something about this earnings season that could make it especially lucrative for traders in the know — and incredibly painful for traders who are not. Find out what that is here.
If you’re interested in trading alongside me this “volatility season” for the chance to make some truly eye-popping profits, I have put together a free presentation, which you can view here.