■ TL;DR
- Q1 earnings season has held up well across banks, oil and big tech – corporate America looks defiant despite geopolitical and macro noise.
- Release-day swings are usually a trap for prop traders, not an opportunity. The moves are too violent and unpredictable for daily-loss limits.
- The real edge is trading the correction, not the reaction. Wait for the spike to settle, then ride the return to trend.
- Apple soared 4.7% on earnings; Meta and MS fell on capex despite solid numbers. Same lesson: don’t predict, read the response.
- Buffett’s rule still applies. Use fundamentals to find context, technicals to time the entry. Pick three names this week, do the homework.
The poets call April the cruelest month, but for traders it hasn’t been all that bad – especially those who trade earnings season. In fact, one may say that – considering the geopolitical circus, inflation wobbles, FED rate noise, and other news-cycle ills – the reports for this past quarter have not been bad at all.
Banks, oil companies, big tech … it’s hard to find anyone panicking, and in most cases the results did not disappoint. The corporate cosmos has been resilient, even defiant.
And yet, the question remains – for the prop trader, who is usually a day-trader by inclination, do shares offer an opportunity or a trap? Forget the gradual movement in a share over the years of a company’s fortunes, are the swings of quarterly earnings reports too wild to handle?
It’s in the Release
Four times a year, at the end of each fiscal quarter, companies listed on the world’s stock exchanges report their earnings, including earnings per share, net income and sales, and any other information investors may need to determine their position on a stock. The reports usually begin coming in during the second week of the month following the end of the quarter (January for last year’s fourth quarter, April for this year’s Q1, July and October for Q2 and Q3, respectively). And for anyone seeking to trade the swings in equity fortune rather than a share’s plodding long-term evolution, those are the action months.
For prop traders, the actual release dates should probably be best avoided, since these are times of volatile swings, based on results exceeding, disappointing or matching analyst expectations. However, the immediate return to norm certainly presents opportunities for safe, trend-following bets.
On Apples & Gravity
A good example is Apple, which last Thursday reported a 17% increase in revenue (YoY) and an earnings per share of $2.01, which was up 22% YoY.
Both of these exceeded skeptical Wall Street estimates, sending the stock soaring 4.7% in a single day – the biggest positive contributor to the S&P 500 for this past quarter. As the week drew to a close, however, we saw the stock correcting downward to just below its moving average into the lower Bollinger band, with the RSI in neutral territory. A safe guess would expect the stock to settle above the previous trendline – an excellent sell position for cautious traders entering just after the spike on Friday morning and following the oh-so-dangerous gap following the previous evening’s release.
It Ain’t Over Till…
As always, the prop-trader’s job is not to guess the results but to play the reaction, not to try and get in on the main movement but to ride the correction. Confirming an existing narrative is always easier than trying to write an unknown one – especially when faced with two unknowns to begin with: how did the company perform, and how did traders respond? For example, this past week, both Meta and MS shares fell despite solid earnings and mainly due to capital expenditures. Instead of investing in the knee-jerk reaction, prop traders should look for the correction.
And here, the secret is homework: never (as Warren Buffett continually admonishes) invest in something you don’t understand. Learn to read an earnings report, find out what makes a company an investment opportunity, and before seeking the technical entrance and exit points for a trade, learn the fundamentals to ascertain what constitutes a momentary reaction, and what the norm is towards which the stock price will be returning.
Tuesday morning (NY time) will be PayPal’s turn to deliver its numbers, with expectations for a decline in EPS despite higher revenues. And Airbnb will be up on Thursday. Tech followers may want to watch AMD – NVIDIA’s chief rival in the AI chips market, which is growing exponentially – and which Yahoo Finance seems to be pushing for a pre-release buy signal. Analysts are expecting to see a 32% increase in revenue and a 35.4% increase in earnings, year-over-year.
In all three cases, that leaves you with at least two days to read up on your upcoming investment.
About the Author
Barry Sadovsky is a leading Analyst covering the Financial Markets for the last 20 years. Find more about Barry on his LinkedIn Page →
