Earnings Season Has Begun. Here’s How to Make the Most of It


Earnings season began yesterday and will grow increasingly busy through early November. Here’s what to expect.

First, it’s useful to know the general sequence of events. Next, how’s the sentiment going into the events? Third, how can you follow the news? Finally, what are some key trading strategies to know?

Guide to Earnings Season

Earnings season begins with major financials like JPMorgan Chase (JPM), Citigroup (C) and Bank of America (BAC). They’ve mostly sat near their lows of the year because the coronavirus recession has crushed traditional banking. It’s lowered interest rates and pushed loans into default. There are also questions about future growth after so many activities financed by banks, like office buildings and shopping centers, have been shut down.

Technology follows. It’s actually benefited from the crisis. Netflix (NFLX) comes first, followed by Amazon.com (AMZN), Facebook (FB), Apple (AAPL) and Microsoft (MSFT) later in the month.

The following weeks have a broad mix of other sectors like industrials and health care. Be sure to check Market Insights for more details about what to expect and recaps of the big reports.

Retail and consumer stocks come at the end of earnings season. (This is because they mostly have fiscal quarters ending one month later than other companies.) This group could be interesting before the holidays, especially because some stocks have found ways to survive in the age of coronavirus. Gap (GPS), Best Buy (BBY) and Bed Bath & Beyond (BBBY) in particular stand out.

Sentiment Could Be Improving

Sentiment obviously took a beating when the pandemic hit, and it’s remained bearish as the economy struggles to recover. However there are indications of it finally turning.

The American Association of Individual Investors’ regular survey found that 34.7 percent of investors were bullish last week. It was the highest reading since early April. Perhaps even more notable, the eight-week moving average has started inching higher in the last month but remains about 8 percentage points below the long-term mean.

These numbers could indicate investors were concentrated in cash and are just now starting to gain confidence.

Next earnings date workspace tracking members of the Dow Jones Industrial Average.

Separate data compiled by Factset and Refinitiv show Wall Street could be at a similar tipping point. Both firms found almost every company that reported so far beat estimates. Their numbers have slightly different parameters and time frames, but their conclusions were the same: Analysts are too bearish.

Next, estimates have been tipping in a positive direction. Factset reported last week that Wall Street now sees earnings down 20.5 percent in the third quarter. But that’s a big improvement from the -25.3 percent estimate at the end of June.

Tools to Follow Earnings Season

This earnings season is also unique because TradeStation just rolled out new technology to help users stay on top of the news.

The indicator Next Earnings Date is now available in the TradingApp store. Customers can add it to a list of stocks in RadarScreen® to know when they’ll report earnings. That allows easy ranking based on time or other metrics like price or market capitalization. (We’ll also have a special presentation on the functionality next Tuesday afternoon.)

Strategies for Earnings Season

Earnings are usually among the most important events for stocks. They can trigger big price moves and draw attention to management teams. Analysts add to the drama by giving opinions on results.

Traders can navigate the volatility with options strategies like vertical spreads, covered calls and protective puts.

They might consider a vertical spread if they consider a sharp move higher or lower. Options traders can buy calls near the money and sell other contracts at higher strikes to leverage a rally. Alternately, they can do just the opposite with puts if they’re bearish.

Either way, the vertical spread is a common strategy for playing a directional move with limited capital at risk.

Covered calls are just the opposite. Say one of your stocks has rallied into earnings. You can potentially sell calls against it to generate premium. That will partially hedge against a drop. The contracts sold will also lose time value. The drawback is that you could miss some gains if it rallies.

Finally, traders can buy protective puts as a hedge against bad earnings. Protective puts can cost a lot, but they also let investors profit from a strong report.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.