Our strategy at EarningsBeats.com just simply makes good common sense. If you want to find the best earnings reports BEFORE they’re reported, follow relative strength. I’ve explained this many times, but let me do it again. Wall Street firms talk to management of companies throughout the quarter until four weeks before the company’s quarter ends and the extended period leading up to when a company makes its earnings announcement to the public. This prohibits anyone from gaining insider information before it’s released to the public.
Following the price action is, in some ways, gathering information prior to quarterly reports being released. But it’s legal. It provides us a sense of what the big Wall Street firms believe about a company’s prospects and those firms communicate frequently with management teams during “non-quiet periods”.
During past quarters, I’ve done studies on how company’s report earnings given their relative strength status among peers. It’s been quite obvious to me that if you are a relative leader in price performance on your charts heading into an earnings report, then odds are much greater that the company will release strong results. It’s definitely no guarantee, but in trading, we’re looking for clues that boost our odds. After 40 years of investing/trading, I’m not aware of ANY strategy that works all the time.
Bank Earnings
JP Morgan Chase (JPM) posted great results, but it was very easy to assume great earnings were coming. Why? Well, look at the chart and check out the relative strength line, which hit a 52-week high in December, the last month of Q4:
This is the definition of a leading stock within a leading industry group. Those bottom two panels are as important a clue as anything I’ve seen in determining whether a company will beat its revenue and earnings estimates. In the case of JPM, this revenue and earnings beat led to higher price action, but that’s not always the case. Therein lies the reason why buying leading relative strength stocks will not always mean a gap higher in price. There’s this thing called, “buy on rumor, sell on news” that can result in selling after a hugely bullish revenue and earnings beat. But the beats tell me to add JPM to a watch list and pounce on the buy side when it’s appropriate (breakout, pullback to support, etc.).
Our last EB Digest newsletter article from Wednesday, January 15th featured another financial stock that looks quite similar to JPM in terms of relative strength and being a leader in a leading industry group. Check out Interactive Brokers Group (IBKR), which will report its earnings on Tuesday after the closing bell:
IBKR has been strong, gaining 114.45% over the past year, but it’s relative strength keeps pushing higher and higher. It’s also a part of a very strong investment services industry group ($DJUSSB). I see another HUGE earnings report coming on Tuesday. I’m not sure whether it gaps higher or not, but if revenues and earnings beat consensus estimates, the IBKR will be saved onto a Watch List (for us, that means our Strong Earnings ChartList, or SECL). Then we could consider buying on an after-earnings pullback sometime down the road.
Weekly Market Recap
Every weekend, I recap the prior week’s action and today’s was quite interesting. After all, what do the inflation folks cling onto now? We just saw both December Core PPI and December Core CPI come in below expectations and the 10-year treasury yield ($TNX) dropped like a rock. Meanwhile, we’ve now seen the yield curve uninvert, leading to strength in banks ($DJUSBK). For a discussion about all of this, be sure to check out our YouTube video, “The Ghost of Inflation? Market SOARS on Tame Inflation Data”. While you’re there, please help us by hitting the “Like” and “Subscribe” buttons. Leave a comment and let me know if you agree or disagree with my discussion.
EB Digest – FREE Newsletter
If you’re not already an EB Digest subscriber, please register now. It’s completely FREE with no credit card required and it’s simple to sign up. REGISTER HERE to enter your name and email address and, on Tuesday, I’ll send you yet another leading stock in a leading industry group poised to deliver BLOWOUT earnings results when they report.
Happy trading!
Tom