I cordially invite you to witness a little-known market phenomenon play itself out over the next few weeks.
It’s called post-earnings announcement drift (PEAD).
Everyone knows that a stock will experience a price surge when it surprises on earnings.
For example, last week, eyes were on GameStop Corporation (GME) ahead of its earnings announcement.
Instead, GameStop’s earnings announcement showed that comparable-store sales rose 5.8% in the first quarter. (Comparable-store sales is the Holy Grail metric for retailers.)
As it turns out, the company is beginning to figure out how to unlock the lucrative mobile market. As a whole, mobile revenue grew over 100% year over year to $102.2 million.
Analysts were expecting earnings of $0.57 per diluted share.
When the company reported $0.59 per diluted share, the stock jumped over 7%.
Had GameStop beat earnings expectations by a wider margin, the stock would’ve spiked even higher.
This is not an unusual event, whatsoever.
However, as a former trader myself, I can tell you that it’s extremely challenging to predict the outcome of earnings reports.
It’s like betting red or black on a roulette wheel.
Losses suffered as a result of negative earnings surprises typically get offset by the gains made on the predictable outcomes.
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Armed with knowledge of the PEAD phenomenon, however, why even bother gambling on earnings reports?
What most investors don’t realize is that stocks continue to drift in the direction of the earnings surprise.
Of course, the biggest moves come within a week of the earnings announcement. But the price will ultimately drift for another 30, 60 and 90 days thereafter.
In GameStop’s case, the stock has traded down to its pre-surprise levels, which represents a perfect PEAD-inspired entry point.
At the very least, I urge you to concentrate your buying on only companies increasing earnings.
If you look at the 146-year history of the stock market, the one irrefutable fact is that share prices will always follow earnings.
Onward and Upward,
Founder, Wall Street Daily
More Storylines Impacting Markets
Near-Record Appetite for Risk
Investor risk appetite, as measured by Sentimentrader.com, has significantly increased since hitting a low on February 3, 2014.
The May 15 reading of 93% shows that investors are aggressively seeking riskier assets. The 93rd percentile corresponds to the top 3.5% of all readings since 1998, and is a strong signal that stock prices will struggle to move higher from current levels.
This level is in stark contrast with the extreme risk aversion reading of 19% in early February 2014, which proved to be an excellent contrarian indicator – showing an oversold condition in the markets. Investors should never ignore this indicator!
Germany Facing a Slowdown
Germany is facing severe macro-economic changes based on its Asian export dependency and a neglected understanding of its Russian exposure.
These threats will likely cause Germany to see negative growth numbers by Q4 2014, and increase the odds for a protracted European recession soon thereafter.
Germany exported more than 16% of its goods to Asia in 2013, but has seen a decline of 5.4% in Asian exports so far this year. And with more than 6,200 German manufacturers having exposure to Russia – accounting for more than 300,000 jobs – Russia poses an even more serious problem for Germany.
Russia is Germany’s 11th-biggest export market, but more importantly, it’s Germany’s largest source of energy – accounting for more than 25% of its energy needs. With further sanctions against Russia likely, German GDP will certainly decline due to Russian attempts to punish Europe for sanctions applied against its Ukraine policy.