First off, I just wanted to point out that the next few trading sessions are likely to be marked with increased volatility and above average chances for some fairly sizable opening gaps in either direction. The largest component of both the Nasdaq 100 & the S&P 500, AAPL (Apple), is scheduled to report earnings after the close today as well as another top component of both leading indices, MSFT (Microsoft). FB (Facebook) reports after the close tomorrow with AMZN (Amazon.com), another market leader, on deck for Thursday after the closing bell.

As far as how to or even whether or not to trade around earnings is completely up to each trader. Long-term investors shouldn’t be overly concerned with a companies quarterly earnings release other than maybe to time entries or exits on a position that they were already considering buying or selling. In other words, if one had a fat profit in a position of AAPL that they have been holding since the lows last year and they were already considering selling the stock as their profit target has been met or exceeded, why not step aside now vs. gambling on a possible 10%+ gap against their position tomorrow, should AAPL miss expectations or give less than stellar guidance?

In regards to swing trading, whether or not to hold a specific position into earnings or even to hold any positions during a period of such potential market moving releases as mentioned above is an important decision that each trader will have to make for him or her self. Some traders will always close positions before an earning release as part of their trading rules as to avoid to risk of being caught on the wrong side of a gap while others, myself included, make the decision to fold or hold based on the unique circumstances surrounding each position at the time. The factors that I consider when deciding to hold or fold include:

  • The trading history of each position following earnings releases. Has that stock traditionally experienced large gaps following earnings? Typically large gaps are experienced from companies in high-growth or niche industries or those companies that derive a large percentage of their revenues from just one product or service. More established, diversified and mature companies also tend to have more predictable earnings than that of newly listed or start-up companies.
  • Where my position is relative to my trading plan. For example, if I have been holding a swing trade for two months with a profit target of 20% & the position already has embedded gains of 18% then I might opt to go ahead an book profits early in order to avoid risking giving back a large part of those embedded gains while only holding out for another 2% upside.
  • The current technical posture of the position. If my position is still well shy of my profit target but charts (technicals) are no longer clearly favorable in the direction of my position, I may decide to close the position earlier. If the technicals are clearly aligned in direction of my position and I don’t see any other reason (such as those mentioned above) to close the position, then I will often hold through earnings. It has been my experience that more often than not, stocks will gap in the direction as indicated by the  technicals.

Two recent examples of this would be the current BXS short trade, which gapped down sharply today & is currently trading down 7% following their earnings release after the close yesterday. Just a few days earlier I mentioned the sharp plunge in another regional bank that was on my watch-list as a short candidate, FRC, which plummeted on Wednesday following its quarterly earnings release even thought the initial headlines read “First Republic Reports Strong Quarterly Earnings”.

As some might recall, I began making a very clear and solid bearish technical case for the regional banks starting with the June 25th Likely Top In the Regional Banking Sector post. Is it a coincidence that nearly all the post-earning surprises in the regional banks have been to the downside vs. the upside? Maybe but I doubt it. News almost always follows the technicals and that includes, of course with some exceptions, the news or more specifically (and importantly) the reaction following the headlines. By that I mean that at times, stocks are sold on good news and bought on bad news and more often than not, the reason behind such seemingly odd reactions can be found through proper analysis of the charts.

Best of luck with your trades this week and as I like to say; When in doubt, get out. (i.e.- step aside & go to cash).