Earnings Seasons for Stocks

There are a few things that can rock the stock market positively or negatively: a major world event, a major company gets caught up in a scandal, election results, or company earnings.

Four times a year, publicly traded companies announce their quarterly earnings results. Some companies (like Apple) are such sector and market giants that their earnings will affect the whole sector – and sometimes entire market.

Earnings season definitely adds an element of uncertainty. If a stock you’re interested in buying is scheduled to report its earnings, buying it beforehand could work for or against you in a big way. Suddenly it feels like you’re placing a bet instead of making an investment.

It’s great if it gaps up in price. Your portfolio will glow thanks to this stock’s incredible move. You’re an amazing investor and have become unstoppable at picking stocks. It’s in your destiny to be the sage investment advisor among your peers.

If the stock gaps down, the feeling is the complete opposite. You’ll be spending your time looking into why the company had good earnings, yet it still came down hard in price. What horrible luck were you just cursed with?

Financial analysts are always trying to predict the earnings results of major companies. What happens then is that traders start to take their positions and buy shares in anticipation of the price going up in a big way. When the actual earnings report comes out, if the predictions were correct, the price usually goes up by a lot because other investors who were waiting on the sidelines are now acting on the correct information. If the predictions are off by a lot, it can send the share price down – even if the company had a better quarterly earnings report than the analysts predicted.

This doesn’t seem to make sense until you start thinking about the psychology behind pricing. There is one thing you should never lose sight of: Stocks move in price based on investors’ perceptions. Analyst predictions are important because they shape people’s perceptions on what they think is a fair price for shares. So, even if the earnings are predicted to be weak earnings, investors can decide on what is a fair share price based on those predictions. People like predictability, even if the information isn’t always good. We don’t like unpredictability because it increases uncertainty. The root of risk lies in uncertainty. 

If you’re planning on buying a stock that has yet to report its quarterly earnings, you can either wait until after its earnings report comes out, or just buy a fewer number of shares to lower your exposure to risk. Sometimes, after an earnings report, the share price stays the same. If it’s higher or lower in price by a significant amount, then I recommend waiting until it settles down before buying more shares. Any big move will trigger a lot of action before it gets quiet again. The trading volume will eventually go down and the daily price ranges will go back to being average. Refer to any of my lessons on price consolidations under the category, “How I Find and Pick Stocks.”

If you own a stock for a while, you’ll know that the big ups and downs from earnings come and go like the seasons of the year – it does happen four times a year, after all! You need to recognize that you buy a stock for more than just its quarterly reports. You invested in the company because you like its product or service, its sector, its dividend, and hopefully, the low price you got it at (thanks to all the techniques I’ve been trying to teach you!).

Some More on Sectors

Rack

My closet, the retail sector.

How I Stumbled Upon Sectors

With investing, I try to think in terms of the big picture. I find it useful to be aware of the moving parts within this picture. When I started to learn about stocks, I was clueless. I couldn’t read a financial column. JP was reading the Wall Street Journal and he had to translate everything for me. At that point, I only understood how a stock worked and what a brokerage account was, but that was it. I had taken courses in business, accounting, and investing, but so much of it went over my head. I just had a lot of different information floating about and not enough experience to apply this information as a novice trader.

I decided to take the Canadian Securities Course to get a better idea about the financial industry, investments, how they work, what professionals do, and what investors need to know. It was great because I could go at my own pace and get more into the stuff on equities. I honestly can’t say studying for the exam was loads of fun, but I was happy enough to pass. I loved that I ended up with a better idea about the workings of the financial world and Canada’s economy.

The more I learned about investments, markets, and the economy, the more fascinating money was to me. I became more aware of the psychological component with money, spending, saving, and investing. There is nothing static about the markets, the spending trends that drive the economy, the saving spells that slow it down, and particularly the movement of money between the different sectors and industries.The market is constantly in flux because it’s made of many different components that drive these fluctuations. Money is always being made somewhere.

One of the most important things I learned is that getting a good read on the economy will help you make better investment decisions. Having even just a basic understanding of the economy can make the difference between a novice investor and a savvy one. I found that watching sectors has helped me make money in the short term and longer term. Sector watching can also give you some idea where the overall markets might be headed towards. Sector movement can help determine why a market is up or down. Understanding sectors is important enough to me that I discuss them along with the economy in my book, Loonie to Toonie.

One of my readers seems to share my interest in sectors and has been asking me about where to find more information on them. I’m happy that she’s recognized the importance of understanding sectors and wants to do her own sector research.


Some Places to Look Up Sector Performance

Click here for a great list of sector indexes that track TSX stocks. If you click under “Symbol,” you will be taken to the index’s chart. You can select the time frame at the bottom of the chart. I suggest looking at the 1-year chart, or even longer. I find that longer time frames provide better insight on overall sector performance. For U.S. indexes, you can find a handy sector list here.

I’m often stalking stocks and looking for new ones that might possibly make a move in the near future. As I mentioned in a previous blog, “Stock Picking – Part 3: Factoring in Sectors and the Market,” I look at stocks, their respective sectors, and the market. It’s easier for me to just type in a sector index’s ETF symbol when I’m on my charting screens.

One thing to note: ETFs don’t always move in sync with their corresponding indexes because ETFs are actively traded on the exchanges. Sometimes ETFs will move more or less than their index as it depends on the trading volume and demand, or lack thereof. Having said this, looking at the sector or market indexes will provide a more accurate picture than the ETF. I’m super lazy, so it’s easier for me to just type in a sector ETF that I’m familiar with if I’m just looking on my phone and I’m not on my trading platform at my desk.

Reports on Sectors and the Economy

Economic reports happen every day. Some get more attention than others. The more important the report, the more effect it’ll have on the markets. Some of these reports are sector-focussed. Some sectors give big clues as to where the market could be headed. For example, a strong economic report on new home sales could indicate an optimistic economy and stronger retail sales. I always look at the US economic calendar to see where there might be a lot of action or potential change in the markets. To know what these reports mean and their significance, click on “Event Definitions.” Here is the Canadian economic calendar and here is the international economic calendar. Many different financial websites have economic calendars, so find ones with formats and reports more suitable to you and your interests.

Media

I sometimes watch CNBC and BNN because I like to listen to industry folks. I could watch that stuff all day (especially CNBC’s Fast Money as they’re traders who sometimes have highly entertaining arguments!). There are always so many different points of view on stocks, sectors, and the economy. There are a lot of opinions out there, many of which are conflicting, but these provide additional context to the charts.

If you read any financial paper, newsreel, website, or blog, you’ll also find a lot of up-to-date reporting on micro and macroeconomic stuff. The news often discusses the employment situation in certain industries or businesses. Consider your own job and the industry you’re working in. You might be able to see where you can be headed career-wise if it’s a growing or steady industry. Look at your bills and see where you’re paying the most. Maybe it’s in a sector that you should invest in. Sectors are out there and also are very much a part of our everyday lives. We know more about them than we might be aware of.


I’m sure my rudimentary research methods would make any financial professional shake his or her head!

As important as it is to know about sectors, there is no exact science in applying this information. It’s just one aspect of financial understanding. Some of your best investments will be so long-term that they will endure decades of economic fluctuations and sector cycles.

In the spirit of being financially literate, understanding sectors and their relationship with the economy will make you more financially fluent. That is how more of us can engage in the important conversation on financial matters.

 

 

 

 

Stock Picking – Part 3: Factoring in Sectors and the Market

Part 3: Factoring in the Sectors and the Stock Market

Objective: To look at how a stock is performing in relation to its sector and the market.


Sectors

Many things can move the market. A major recession. An increase in interest rates. A major election. A major sector going up or down.

In the last couple of years, the oil sector took a big hit due to a saturated market with too many players getting greedy. A lot of the Canadian market is affected by oil because it’s one of our major commodities. So the Canadian market took a huge hit, along with our loonie. This impacted our businesses as it reduced our buying power outside Canada. Having said that, after being so down last year, we had a remarkable recovery and better performance than the US markets since January of this year.

Although the Canadian and US stock markets are different, I often check out the US stock market and sectors to give me an idea of the major trends going on in our part of the world. (I will definitely be looking at the US markets after the election results come out this November!)

The following is my list of sectors and industries that I like to examine. You may be more general or more specific as you can further categorize sectors by looking at the different industries that fall within them. I like to check these out from time to time to see if there are new opportunities, or if current opportunities look like they might run dry soon. Please note that this list doesn’t contain all the sectors and industries.

  • Utilities (XLU)
  • Consumer staples (food & beverages, cigarettes, household & personal care products) (XLP)
  • Healthcare (XLV)
  • Pharmaceuticals (PJP, XPH)
  • Transportation, shipping, and delivery services (IYT)
  • Financial (banking, lending services, and insurance) (XLF)
  • Retail (XRT)
  • Basic materials & construction (IYM)
  • Tech (XLK, AAPL, MSFT)
  • Energy (OIL, XOP, IYE )
  • Home building (XHB)
  • Gold (GLD, GG, AU, NEM)
  • Silver (SLV, SLW, AG/FR.TO)

The way I check out these sectors is by looking at their respective ETFs (exchange-traded funds) or the biggest stocks in those sectors, marked by the blue ticker symbols. If you’re not sure what an ETF is, that means you definitely haven’t yet read my book where I explain ETFs and indexes in easy-to-understand terms (Read it! The eBook is $2 right now!). I look at more than one ETF for some of the sectors.

You can create lists of any stocks you want to keep an eye on when you use freestockcharts.com. I have a list saved for sector ETFs. I can just easily go through my list on freestockcharts.com and check out the charts. Also, you can look up a sector by typing something like,”Retail etf,” anywhere on the screen in FreeStockCharts and a bunch of options will come up and you can select from the multiple options.

chart-1d

I apply the same principles when looking at the charts of each sector as I do stocks. I try to see if the sector has been hot for a while (well above the airplane) or if it’s just starting to warm up (at or below the airplane), or if it’s been quiet and moving sideways (along the runway). If a sector has been moving sideways and just starting to move up, I’m more interested in stocks that fall in that sector because it means there could be new opportunities to buy at lower prices. In investing, this is called “sector rotation.” If a sector is hot, I’ll wait for it and its stocks to cool off.

Remember the main M.O. of a savvy investor is to always look for new opportunities, not to follow a trend that’s far into its season.


The Stock Market

There is a lot of fear-mongering, even among savvy investors, with regards to stock picking and timing your investments with the market. It’s because people hate being wrong. No one wants to give wrong information. But for anyone who’s invested, you know you can be wrong for one month and then be right the next month and be well in the money. You can be right for one or two days and it’ll be months or, in rare cases, years before you’re in the money again.

It is hard to know exactly where the market is headed, but it’s easy to see where it’s been–to me, this is more important than making predictions. The way I see it, if it’s happened already, then you have something real to work with.

For the Canadian stock market, I look at these ETFs:

  • XIU (iShares X&P/TSX 60 Index)
  • XIC (iShares Canadian S&P/TSX Capped Composite Index)

For the US stock market, I look at these ETFs:

  • SPY (S&P 500 index)
  • DIA (SPDR Dow Jones Industrial Average)
  • QQQ (Nasdaq 100 Index)
  • IWM (Russell 2000 Index for smaller US companies)

I analyze the charts the same way I do for sectors and stocks on freestockcharts.com. I always compare stocks and sectors against the market. I ask these questions:

  • Is a stock lagging or leading its sector?
  • Is a stock lagging or leading its market (Canadian or US)?
  • Is a sector lagging or leading the markets?

My ideal situation: A sector trading on its own page

If the stock market is moving downwards (for the previous month or longer), but a sector has been moving sideways and is starting to heat up, it’s likely going to lead the market. I’ll be looking for stocks in that sector using the criteria I discussed in Stock Picking Part 1.

My less ideal situation: A sector trading like the market will be more affected by the market

If a sector’s chart looks just like the stock market’s chart over the previous month or more, it’ll likely be affected by the market, so if the market goes down, your sector will likely go down with it too. An individual stock better have an amazing chart (LONG sideways trading–we’re talking about a LONG RUNWAY lasting months!) for me to buy it without a stabilized sector behind it.

The situation I avoid: A sector in trouble

If a sector is weaker than the market and it has been heading down on its own, I’ll avoid it and any stock in that sector until I see the sector stabilize and trade sideways again.

I’m not that concerned with what the stock market is doing. In the past, I’ve been shaken out of some great opportunities because I was staring too hard at the market, trying to predict its next move. As soon as the market sells off just a little bit, I’d freak out and exit my positions, only to have the market recover after (as it always does since the beginning of stock market history). What is most important to me is how a stock is trading relative to its sector and how the sector is trading relative to the market. I’m always looking to get in early, not late after the party has already started.

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I recognize this is advanced information. You really can buy stocks of companies that you like without ever having to look at a chart and do well. This is more about my swing trading strategies which for me, it has been a great way to make money.


When I look for stocks, I always look at their sectors and the market. I check to see whether a stock is leading or lagging its sector and whether the sector is leading or lagging the stock market. 

Is the idea of stock picking getting you down? You can still invest in stocks without having to pick one. Next time, I’ll get into ‘buying the market’ which is code for investing in ETFs!