This week in stock market investing I decided to get back active in the market. The market has been doing some crazy things going up 5% and down 5%. I can’t manage that. Some people love it but I prefer a decisive trend one way or the other not the whipsaw that we were seeing.
The reason for that is that I am not a day trader. I don’t get in and get out. I get in and stay in. I buy things that I believe will grow over time or that have the potential to swing forward after a long selling period.
Earnings season is a different story though. Whatever you have seen in the market takes a backseat in certain respect to earnings.
Earnings season is a great time to pick up quick money on big decisive swings. This is because at earnings you will see stocks pop 10% to 15% to sometimes more. On a normal day stocks don’t do this. They tend to just go up and down 1% and 2%, nothing special. Nothing life changing. Earnings season moves, however, ARE life changing moves.
I have made $5,000 over night and have made $1,000 on trades multiple times. Last year I made about $25,000 trading options over and above my working income and my real estate and businsss income. Last year was a good year but this year will be better.
I have considered quitting 9-5 work just based on earnings season money. Earnings season money will likely pay off my college student loans. Real estate will pay for my law school ones. Remember that you don’t pay off your loans with your working income.
When I first started trading earnings I would just pick a few stocks here and there and hope for the best. I would diversify. Diversification is for people who don’t know what they are doing. When you diversify you plan to lose and when you plan to lose you tend to lose.
The purpose of this post is to discuss trend that I have seen in the market. For those that are unaware there is something called the efficient market hypothesis. This theory states that all news is priced into the stock price. For this reason, those who have material non public information have an advantage over those who do not.
This theory indicates that the stock has a price that is in line with the information that is available. My problem with this theory is that it doesn’t take into consideration the anticipation of news such as earnings. When a company releases earnings, sometimes what you will see is movement ahead of the announcement. Companies people love will improve and companies people hate will decrease in price.
Typically what happens is the earnings “surprise” will cause the stock to turn one way or the other. This is where the money is made.
My problem with this is that it can cause you to misfire if you don’t read charts properly. What I mean is that no matter how much you love a stock and know it is a good company, if all this is priced in the stock can still get slammed even if they beat on earnings. The opposite is also true. If there is a stock you hate and want to avoid but is on a downtrend it can win even if the news isn’t that good. Sometimes news that isn’t as bad as people suspect is just as good as good news.
This week an example of this in some way was a trade I made in TSLA and Visa. These are both great companies with great charts. I like TSLA because it is a company people love but since it is such a threat to big American car companies there is a constant barrage of negative press against their company. Tesla fell flat this earnings even though they beat estimates. Another was Visa. Visa is a great company that has made me a ton of money. What I saw though was that maybe their run is flattening as well as people try to get a grasp on what is going on in the American economy. They posted great numbers but sometimes a stock that runs up into earnings has the anticipation already priced in. A great company was already expected so there is no money to be made on the “surprise”.
The point of this post is that you have to have a moving target when it comes to earnings. Just because a company is great and is going to win doesn’t mean it is a buy if the potential win is already priced in. Just because a company is bad that doesn’t mean that it will continue to fall even if the news is bad. The key is to stick with your principles. Know your rules and never divert from that.
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