Candlestick Trading Blog

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Whether you are a seasoned veteran or a beginner investing in the stock market, you will no doubt hear the phrase “earnings season” with great frequency. Earnings season refers to the month after each quarter’s end: January, April, July or October. This is the month that companies announce their earnings for the previous quarter. Investors and analysts in the market tend to be cautious when earnings season arrives. Companies that meet, or beat, their earnings estimates reap the benefits with rising stock prices. Companies that miss their number tend to take a beating.

Follow the Leader
For companies that are leaders in their stock sectors, their numbers are issued in advance of earnings season in the form of earnings estimates. There is an unfortunate domino-effect when industry leaders miss their numbers. Often times, a slip by the industry leader will affect the stocks of other companies in the same business sector Because of the significance of the leaders’ earnings, most market analysts follow these companies’ earnings and issue earnings estimates, which are reported in earnings per share.

Cloudy Picture
Sometimes earnings season brings a clear picture of where a company stands; other times, it’s not so sunny. Some in the stock market believe that earnings season is a good thing, where management is offering a projection as to where the company is financially. Other people believe that earnings season is simply a practice which provides a forum for management to use misleading information about the company in an effort to improve the standing of its stock prices. There would be the temptation for a company executive to issue a lower forecast than their research shows in order to exceed that forecast when earnings season rolls around.

Charges have been made in the past that companies have, in fact, manipulated the numbers in order to make the financials look better. “Earnings guidance” is a management estimate of where the company is headed in the future. There are rules concerning the content of this report, but there is also ample opportunity for the company to polish the numbers to appear better in the eyes of successful traders.

There is also another little earnings season item to recognize; this is called “whisper estimates” and it is another source of earnings estimates. This is an unofficial supply of stock market information, usually coming from a company source, an inside trader or investor. There is no real way of confirming this information so it is wise to be careful and perform more fundamental analysis before using the whisper estimate.

Who Benefits from Earnings Season?
Not everyone benefits from earnings season information even if it is accurate. For long term investing, earnings season really has no bearing on market strategy. An earnings season report is short-term information and a long-term investor may only look at this info as a possibility to pick up another low priced stock or to dump an asset that is struggling.

Conclusion
Like metrics for technical analysis, there is some benefit to the information gathered at earnings season, but it should not be over-emphasized. This is only one piece of information and before buying or selling, you should confirm your findings with additional research. Earnings season is the opportunity to identify movement in the stock market and use that movement to your advantage.