How I Am Tackling Earnings Season

Guidelines and rules to navigate the volatility

Volatility doesn’t equal opportunity.

The Australian market is right into the meat of the Earnings season. This time of year appears as a playground for the short-term trader. There are catalysts aplenty with extreme stock volatility and intraday movement. However, it is also the period that can bring out our deepest problem patterns- chasing moves, overtrading, and biases leading to outsized losses.

Most leave the month overwhelmed and frustrated.

Historically, I felt like this. Trading earnings has been a major source of weakness for me. However, I have worked hard to filter and turn it into a strength. I have built playbooks and formed guidelines to better steer through this volatile market period.

Here is my game plan as well as some current observations that may help you navigate the remaining opportunity set.

(Before I continue, I wanted to thank all the new subscribers for the member’s service. I have been truly overwhelmed with this initial show of support. There are great things to come and your sponsorship is the perfect motivator. If you haven’t already, you can sign up here)

General Guidelines To Follow

Constructing frameworks builds mental models that cut through the noise in real time.

Here are the most important steps to internalise:

1. Increase scrutiny to focus on edge: with so many names reporting, it is often hard to know where to start. The market is more prepared and has more time to digest the news early on Day 1. This leads to increased efficiency in pricing. Ask yourself if you have an edge via the ASIA acroynm. Some examples:

   -Do you have an Access edge to a price or liquidity in the auction that is not reflective of the magnitude of the news?

   -Do you have a Speed edge to front run incoming flow?

   -Do you have an Information edge on the news itself via consensus numbers or broker flash notes?

   -Do you have an Analytical edge based on a backtested strategy or past data?

   The more variables in your favour, the more powerful the potential trade opportunity. Conversely, if you do not have multiple layers then why are you risking capital? Don’t try to be across it all but instead, focus on the stocks you know with meaningful news that breaks the previous equilibrium. Increase your criteria to trade.

2. Beware the gap: the intraday chart must align with the daily. What this means is that I don’t want to be chasing stocks that are extended on the upside or the downside on the Daily chart. These do not offer good risk/reward intraday setups. Be careful of joining extreme gaps +/- 10%. This often leads to traps, high slippage, and less intraday trend. The gap is signaling that the market is informed and pricing the fresh news accordingly.

3. Buy the strongest: the market rewards just a few names with multi-day re-rates. This is where you want to spend your energy going with the new flow and new positioning. Trading with the wind at your back is so much easier. Track these stocks via data, watchlists, and alerts. Drop down a timeframe to wait for your underlying setup. Make life easy on yourself rather than fighting.

4. Doing less is doing more: you only need to maximize one of two names to put up a truly good monthly score. Where most come undone is trying to be across everything. This leads to a lack of focus and feelings of being overwhelmed. Only by filtering can you execute to the best of your ability. Who cares what everyone else is doing or what other random stocks are moving? It is out of your control. This is a nice segue to the next point.

5. Preparation is key: the quality of your results will reflect the level of your preparation. Have tools ready to assist your decision-making. These can include consensus numbers ahead of time, commentary notes, or a well-functioning team of other traders to help digest the news. Block out distractions and notifications during your preparation time. Automate where possible to plan size, stops, and execution. This takes away discretion and increases bandwidth. For those interested, contact me for details of the preparation spreadsheet I use for this process.

6. Be ruthless with stops: despite all the hard work and preparation, price action is the ultimate truth. As a trader, there is no time for a fundamental bias with the amount of flows that are being put to work. Good news can get sold as the market is pre-positioned. Bad news can get bought as funds want to top up (hello Australian Super). Our job is to make money. Have a game plan pre-open about the underlying volatility of a stock. The stop should reflect where the idea is wrong and will in aggregate move against you. Thus, it makes no sense to not get out of everything. One outsize loss can do so much damage to the entire month. You have to be a particularly good loser during Earnings season.

7. Do not short on big gaps lower: even when it reads, looks, and feels so bad, I still cannot make money consistently out of shorts. The big gaps are often traps and the lower probability trade. Sure there are outliers but the normal course of events is whippy price action or V reversals. The Australian market is dominated by long-only super funds. Furthermore, in bull markets, it is those who are long who outperform the benchmark. In turn, they receive more inflows which feeds itself into more buying. Money has a way of coming into “bad news” as it provides a liquidity event and a cheaper long-term entry point. It is what it is.

Where Is My Focus