As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
After a company announces quarterly earnings below street expectations, what happens? This article discusses what I found and answers a number of questions about the behavior after such an event.
I used hundreds of stocks to uncover thousands of bad earnings surprises to develop the model shown in the chart on the right.
For stocks that breakout downward (I define a breakout in Methodology), they drop a median of 3% in one day. That is the AB move, where A is the last close before the earnings announcement.
The stock continues moving down, dropping a median of 8% in 7 days. That is the AC move, not BC.
Then bottom fishing begins and pushes the stock back up to break-even (0% above A) to D.
After peaking at D, the stock tumbles and closes down a median of 14% in 38 days. That is the AE move.
Since these are median values, half the stocks will do better and half will do worse each number. That means your situation may vary widely from the model.
"Bad earnings surprise" means the market drops after the announcement of quarterly earnings. It is not necessarily an earnings miss, where the company falls short of its goals. Rather, it is the market's reaction to the announcement that is important.
For example, a stock could meet its estimate, but if it still misses the "whisper number" (the number analysts and the market expects or hopes), the stock can tumble.
Alcoa gives a good example of the behavior after a bad earnings surprise. I would like to say this is the typical behavior, but the reaction to the announcement can vary widely from the model. It's important to look at how the stock behaved during prior bad earnings surprises. That should give you a clue to how it will behave this time. Use prior events as guidance but expect deviations.
Alcoa announced earnings after the market closed at A. The next day, the stock reacted to the news by plunging to B. The price closed below the low at A, the stock broke out downward.
The stock eased lower, not by much, to bottom at C. Then it bounced and climbed to D, about what it was before the earnings announcement.
After the bounce, the stock tumbled to E.
The behavior made me ask lots of questions about quarterly earnings.
- Should you hold onto a stock through quarterly earnings?
- If you own the stock and see price falling during the session, should you sell immediately?
- If you own the stock and find out about the earnings miss a day after the market learns of it, should you sell?
- Should you buy a stock after surprisingly bad earnings (bottom fishing)?
- After the earnings report, what happens to the stock?
- How long does the stock take to reach the ultimate low?
- If you hold onto the stock, how long does it take to get back to break-even?
- Does the next quarter also disappoint? How about the quarter after that (6 months later)?
The answers to these questions appear later
I gathered earnings reports from my database and found 4,822 of them in 471 stocks, all taken from a bull market. The oldest was from September 2006 and the most recent, from February 2015. Not all stocks had earnings reports that I tracked over those periods.
I gathered information on three type of earnings.
For the 1-day move, this is what I used for the three types of releases...
I measured the move from the close the day before to the close the day earnings were reported.
I measured the move from the close the day of the earnings announcement to the close the day after earnings were reported.
I measured the move from the close the day before to the close the day after earnings were reported. Essentially, this is the combination of the periods covered for 1 and 2.
These three measures tried to capture the short-term market's reaction to the event.
I only cared about downward breakouts. To determine the breakout direction, I looked for a close below the lowest low of the day that had the last close before the announcement. When earnings were announced "before the market open" and "time not supplied," I looked for a close below the lowest low of the day before the announcement. If price closed above the highest high of that day, then it was an upward breakout, which I discarded. For "after market close" reports, I used the first close below the lowest low of the announcement day.
This system worked well to accurately determine the breakout direction.
The following lists my findings for downward breakouts after an earnings announcement in a bull market.
The "big move" day is the day the market reacts to the earnings announcement.
| Description | Average | Median |
|---|---|---|
| 1. "Big move" drop | 4% | 3% |
| 2. Event decline | 10% | 8% |
| 3. Days to event decline bottom | 13 | 7 |
| 4. Bounce high | -1% | 0% |
| 5. Days to bounce high | 36 | 20 |
| 6. Drop to the ultimate low | 18% | 14% |
| 7. Days to ultimate low | 77 | 38 |
| 8. Days to break-even | 112 | 28 |
| Description | 3 Months | 6 Months |
| 9. Chance of another median (>= 1.8%) drop in 3/6 months? | 24% | 43% |
For the results shown in the table, the numbers may be affected by when the announcement occurred (before market open, after market open, or time not supplied). I used the average or median of the three types.
The one-day "big move" drop is the market's reaction to the earnings announcement and it averaged 4%. The median drop was 3%.
After the stock drops during the market's reaction to the earnings announcement, the stock continues to drop for an average of 10% (8% median) and it takes an average of 13 days (7 days median) to bottom. I measured this decline starting from the last close before the earnings announcement.
Often a bounce occurs after the announcement but before the stock resumes its downward move to the ultimate low. In the figure of Alcoa, it's the rise to D.
I looked for the highest peak from the bounce low (C) to the ultimate low (E). The stock climbed but fell short of break-even by an average of 1%. The median was break-even. This suggests you can get your money back about half the time before the stock drops to the ultimate low.
The time from the last close before the announcement to the bounce high averaged 36 days (20 days median).
The ultimate low is the lowest low before price rises by more than 20%, measured from the last close before announcement to the lowest low. Swings of 20% are commonly used to distinguish between bull and bear markets. I adapted that idea to what I call the ultimate low.
If you do nothing and hold onto the stock, you can expect to lose an average of 18% or a median of 14% over the coming 77 days (38 days median).
Stocks that drop less than the median 3% in the "big move" take longer to reach the ultimate low than do those that have a steeper "big move." This makes intuitive sense. Imagine that two stocks are going to drop to $10. Which will get there first, one that drops quickly or one that drops slowly? The fast one will get there first.
This is the average and median time (calendar days) it takes the stock to climb back to the last closing price before the announcement. It takes less than a median of 1 month for most stocks, but slower stocks lengthen the average. They take almost 4 months.
How often does a second disappointing quarter occur? An earnings miss followed the first one 24% of the time and at least one occurred within 6 months (2 quarters) 43% of the time. "Bad quarter" means the "big move" day met or exceeded the median decline of 3%.
When you chart the median statistics from the prior table, the figure on the right is what you get. Let's review.
When trading begins after surprisingly bad earnings are announced, the stock drops a median of 3% in one day. That is the AB move.
The stock continues moving down, dropping a median of 8% in 7 days. That is the AC move, not BC.
Then bottom fishing begins and pushes the stock back up to break-even (0% above A) to D.
After peaking at D, the stock tumbles and closes down a median of 14% in 38 days. That is the AE move.
Since these are median values, half the stocks will do better and half will do worse each number.
Let's use these findings to answer some questions.
A: The choice is yours. The model lists the median move and how long it takes to make the move.
For day traders, the stock will likely not make this kind of move since most announcements occur either before or after the market opens (I've only seen a one or two announced during the day). Be sure to check the day's news before the market opens, and know when a company will announce earnings.
For swing traders (trading from swing low to swing high, or the reverse), once the stock makes its move (the drop to (B) then that is the time to react, either to sell short or sell a long holding.
You can also try to time selling short at the top of the bounce (D) in the model)
For position traders (those looking for a trend change), hold onto the stock since the median drop of 14% is less than a trend change (20%). If you get nervous and want to exit but missed selling on the "big move" day, then wait for the bounce (D) and sell then.
For buy-and-hold investors, hold onto the stock. However, recognize that the announcement can cause a slide in the stock that can last months, so check the company's fundamentals and prospects going forward. You don't want to see a big profit turn into a big loss when the company misses earnings quarter after quarter.
A: Yes, if you can catch it intraday. The coming days will likely see the stock drop more.
A: Maybe. Why? Because the stock has made a big move down on the day the market reacted to earnings (B), and you missed that move. So your position is already losing money (or giving back profit). The model suggests a recovery in a median of 20 days (about 3 weeks), lifting the stock back to break-even half the time (D).
Here's my suggestion.
If you're a swing trader, hold onto the stock. Presumably, you can time the exit to catch the stock as it bounces up and before it starts its move down to the ultimate low (E) in the model). For position traders and buy-and-hold investors, keep the stock. Yes, the stock is going to drop, but the median drop is just 14%, which is shy of the 20% trend change trigger.
If you wish to sell, then try to time it to catch the bounce (D). You can put a sell order in at the price of the last close before the earnings announcement.
A: No. The recovery after the stock bottoms can be a worthwhile move. However, your timing has to be excellent, otherwise, the stock is just going to continue down to the ultimate low. Then there's the problem of a second or third quarter where the company misses earnings. That means the stock is going to drop again. My advice is to avoid stocks suffering bad earnings surprises. Don't try to time the bottom.
A: The model shows the median behavior and the table lists the average behavior.
A: A median of 38 days or an average of 77. That's between 1.5 and 2.5 months.
A: A median of 28 days or an average of 112. See Results.
There is a 24% chance of another bad earnings surprise coming in 3 months and 43% within 6 months. See: Results.
This (right) is a chart of 3M (MMM) on the daily scale. I've labeled the turning points to agree with the model.
Earnings were announced at A and the stock did not react for a few days.
I've seen this behavior before, and I've also seen the stock jump up only to collapse the next day and start the move down. It's like a smart money fake-out. Every situation seems to have its own variation.
In this case, the stock started moving lower, eventually bottoming at C.
After C, the bounce started which lifted the stock up to D. Notice that D is above the price where the stock was trading at A, so people had the opportunity to get their money back and more (compared to the last close before the announcement).
Then the drop to the ultimate low started. This dragged the stock down to E.
The figure on the right shows a chart of Albemarle Corporation (ALB) on the daily scale.
At A, the company announced quarterly earnings after the market close.
The next day, B, the stock tumbled like a barrel over Niagara Falls when it reacted to the news.
The stock bounced (D), but eventually dropped to E, where it bottomed...for a while.
On January 29, 2015 (not shown), the stock dropped 13.7% in one day after the company announced earnings. Notice that these two earnings reports were 6 months apart.
Between those two quarters, the market liked the October 22 earnings report (not shown) because the stock recovered from the October low of 51.35 to reach a high of 63.38 on December 5.
-- Thomas Bulkowski
Support this site! Clicking any of the books (below) takes you to
Amazon.com If you buy ANYTHING while there, they pay for the referral.
Legal notice for paid links: "As an Amazon Associate I earn from qualifying purchases."
|
My Stock Market Books
|
My Novels
|
Faith is the quality that enables us to believe what we know to be false.
on