The earning season is a period in which most companies release their quarterly financial results. Specifically, the season starts when the big American banks deliver their earnings. In most cases, JP Morgan, Citigroup, and Wells Fargo are the first to release followed by Goldman Sachs, Morgan Stanley, and Wells Fargo. In the same week, other companies like Blackrock, Johnson & Johnson also release their earnings. In this report, we will look at how you can trade stocks effectively during the earning season.

Why the earning season matters

Traders and analysts are always waiting for the earning season because of the significant market activity that happens during the season. For example, in the first week of the season, the market receives earnings from tens of the biggest banks in the world.

In the third week of the season, hundreds of companies in the S&P 500 release their results. As such, for Wall Street analysts, the season gives them access to new information, which helps them to set new targets. 

Similarly, for long-term investors, the season is an ideal period for them to initiate new investments or even exit their previous ones. At the same time, for companies, the earning season gives them an opportunity to talk to investors and analysts about their future plans. 

Therefore, with all this activity going on, volume and volatility in the stock market usually rises. This is a good thing for day and swing traders. Let us now look at how you can trade during the earning season.

Notice the gaps of Bank of America stock during earnings

Notice the gaps of Bank of America stock during earnings

Use an earnings calendar

The first thing you need to do is to know when the earning season is about to start. Having this knowledge will help you anticipate the companies that are releasing their earnings in advance. Fortunately, this information is available for free in several websites. I prefer using the calendar provided by Investing.com. 

Example of an earnings calendar

Example of an earnings calendar

You can see several things in the calendar. At the top, you can see the dates in which the companies will release their earnings. You can configure this tab to show today’s earnings, yesterday’s, tomorrow’s, and next week. You can also input the exact date range you want to view in the calendar. 

A good option is to look at next week’s calendar every Friday. This will help you know in advance the names you will be watching.

Below the dates is the name of the company. In this case, we have Johnson & Johnson, JP Morgan, Blackrock, and Citigroup. Next, we have the earnings per share (EPS) and the estimate. The estimate is the figure which Wall Street analysts are expecting. A green EPS means that it is better than estimates while a red one is known as miss.

After this, we have the revenue and the estimate. Like the EPS, a green EPS is a beat while a red one is a miss. Next, we have the market cap of the company, which will help you know how significant the company is. Ideally, companies with a high market cap tend to have significant impacts in the market. 

Finally, we have the time. The daylight shown means that the firm will release the results before the market opens. 

Know what to look at in earnings

Revenue and earnings are the most important aspects when you are trading earnings calls. However, they are not the definite aspects. Indeed, it is common for a company’s shares to fall even after it releases strong earnings. This is because investors, analysts, and traders focus on specific information in companies. For example, while Johnson & Johnson’s revenue and EPS were better than expected, its stock tumbled as you can see in the chart below.

J&J stock fell after strong earnings

J&J stock fell after strong earnings

Some of the factors that move stocks during earnings are:

  • Revenue and EPS – These are the most basic factors. Better earnings and revenue tend to move stocks higher. Similarly, if the company misses on estimates, the stock tends to fall.
  • Revenue growth – For growth companies like Shopify and CrowdStrike, investors pay a close focus on revenue growth. If it falls, the stock tends to move lower.
  • Guidance – This is often the most important information during corporate earnings because it gives investors a feeling about what to expect in future. Weak guidance tends to push the stock lower.
  • Same-store sales (SSS) – This is an important number when looking at retailers. A fast-growing SSS is usually a sign that the company is doing well and tends to push the stock higher.
  • FICC – For big Wall Street banks, investors pay close attention to the Fixed Income Commodities and Currencies division, which is often very profitable. 
  • User growth – For social media companies like Facebook and Twitter, investors focus on how the firms are adding their users.

In other words, investors focus on diverse attributes for different companies. For example, for Apple, while the headline revenue and EPS figure is important, investors focus on its fast-growing wearables and accessories business.

Check volume in premarket trading

Premarket is the trading session that happens before the stock market opens. This is because most actions tend to happen during this session as investors react to the events. Investing.com offers a good resource on how to identify key movers in premarket trading. This is shown below.

Check volume in premarket trading

When using this information, your goal is to see the top movers and their corresponding volumes. A higher volume will validate the trend while low volume is usually relatively risky.

Another good option to use when trading during the earning season is level 2 and time and sales values. Level 2 is provided by most brokers and is a measure of how buyers and sellers are positioning their trades. For example, the figure below shows that sellers were overweighing the buyers when Nio Inc. released its earnings.

Nio Inc. level 2 chart

Nio Inc. level 2 chart

Finally, another option of trading during the earning season is to use options. For starters, when you believe that the stock will fall, you buy a put option. Similarly, when you believe that the stock will rise, you buy a call option. A good approach is to check unusual activity in the market. For example, the chart below shows that there was increased unusual put activity for Nikola stock. In response, the stock dropped by 16%. 

Spotting unusual options activity

Spotting unusual options activity

Final thoughts

Trading during the earning season can be a highly profitable thing because of the volatility that usually happens. However, it can also be a risky time to trade, especially for new traders who don’t understand how to read corporate earnings, level 2 tables, time and sale series, and how to use options. For such traders, a good approach is to avoid trading during such period of high volatility. While counterintuitive, it is a strategy that can save them a significant amount of money.