Spot jumps

Date: 2006-10-23
Ticker: %S
Event:: Earning release
Title: Spot jumps
Content:

There are many types of trading strategies. Betting on earnings is a common one. However, this is not a simple “to be or not to be” problem. The outcome may be quite complicated.

First call EPS by Thomason is widely regarded as a threshold to measure a public company’s performance. But a single number can’t tell the whole story. Behind it, there may be scrutiny, sentiment, panic and more a newbie may not expect.
You may lose in bull and gain in bear. For earning jumps, it is more obvious. The key is not only to know the general trend, but also to know it quantitatively and to resist your sentiment.

Just share some experiences:

1) DO NOT bet on a fundamentally deteriorated stock:
If you are not a risk seeker, make your bet consistent in both short-term and long-term. This will help to limit the loss if you lose your bet.

2) Four types:
To spot the jumps, you should be first clear about current market's view point on the stock. Use a similar way to Friedman's, we label the stock by four possible tags: Good angle; Bad angle; Good evil; Bad evil. Generally, evil class includes the most rewarding one: Good evil and the most dangerous one: Bad evil. Good angle may rally but since expectation is already very high, investors are very picky. Room is limited and danger remains. Bad angle may plummet once but hopefully the jump is limited within 5% and rebound is expected in long-term.

3) Overreaction:
Most interesting thing in betting on earnings is to take profit from overdone in early rash. When news comes out, after extreme fluctuation, investors build early equilibrium in extended hours which is usually quite volatile and often overdone. For rally, usually prediction is a little hard. But for plummet, usually overpanic is easy to spot by rule 2). Of course, nothing universal. It depends on many factors. But with good timing, you may even earn after the release than before the release.