Anthony Speciale Stock Market Analyst

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How Not to Trade During Earnings Season

We’re kicking off earnings season this week, as US corporations are set to roll out their earnings for the third quarter. Exciting times to be sure!

Analysts aren’t expecting anything as good as what we saw in the last quarter, which was basically earnings nirvana. That was about as good as it’s ever going to get in terms of earnings increases over the prior year.

But we should still have a steady parade of earnings beats and easily surpass last year when the coronavirus was still limiting a lot of economic activity.

Why You Shouldn’t Be Trading During Earnings Season

Everybody’s excited to begin trading these upcoming earnings… Sure. But when you try to trade earnings, you may as well kiss the money that you sent to your broker goodbye because trading during earnings season is the most difficult thing on the planet.

After all, the brightest minds, statisticians and math geniuses that dominate the options market know it’s earnings season too, and they’d be happy to trade against you.

They know you’re not going to make any money except by sheer luck. They mark the options up, and they price them higher to the point where it’s almost impossible to make money as a retail trader.

But that’s not the only issue with earnings season.

The quarterly focus is total short-termism of the worst variety. A three-month snapshot into the life of a corporation is not as critically important as it’s made out to be, as there are a ton of different factors beyond management’s control that can affect a company’s earnings.

How to Spot Real Money-Making Opportunities

So, as we come into earnings season, here’s what you want to look for… You want to look for great, solid, strong companies to have a bad quarter and drop to bargain valuation levels due to stupid, uninformed selling that is treating this one bad quarter as some prediction for the future.

If there’s a buying opportunity, you should jump on it. And there should be several opportunities to do just that.

Now, my favorite thing to do during earnings season is watch all the regional and community banks that I follow, which I’ve ranked by which have the most capital. And if I see one of those banks get sold off because they fell short of Wall Street expectations, I’m going to be a buyer because earnings have absolutely nothing to do with the valuation of a bank that has a lot of excess capital.

Excess capital reduces short-term returns and earnings. However, it makes the bank a much more attractive takeover target, and I know that the bank has capital that can be used to grow the bank, buy back stock and pay dividends. So, I’m going to be watching my excess capital banks, and if I see one of these opportunities, I’ll likely tell you about it in a future update.

And before you make one of your earnings-based trade, I want you to think about what you’re doing. You are betting your cash on the accuracy of someone else’s guess about what a company’s profits might be.

That doesn’t sound like a great bet to me. It sounds more like betting on what some tout thinks the score of the Monday night football game might be. Bet on the score if you want to, but don’t bet on what someone else thinks it might be.

Earnings season trading is generally a bad idea. Instead, look at it as an opportunity for value to be created by misinformed trading, and be ready to pounce on those when the chance presents itself.