How a stock reacts to past earnings announcements is one of the factors that goes into the decision if and how to place an earnings trade. This segment reveals a study to determine if the direction of the stock on the previous earnings announcement is a clue as to how the stock will react to the upcoming earnings release. This study will give traders the hard data they need to decide how they should weigh that factor.
To help determine how a stock may react to an earnings announcement we often look at what has occurred after the previous earnings release. This gives us an idea of how the stock reacted and if the move was up or down. The question is, does this help? Is it wise to assume a directional movement based on past movement? Specifically, if the last earnings cycle was up (or down) is there more or less of a chance that this earnings cycle will be up (or down) as well?
A study was conducted from 2009 to present using 10 different underlyings. The study followed each stock's earnings release to see if the stocks closed up or down. Then we looked to the next earnings announcement to see if it went in the same direction or it reversed. The table included total earnings cycles, number of reversals from previous earnings and the percentage of time the stocks reversed. A second table broke down the results further to see if the previous move was an up move did that provide any more of an indication of if the previous move was down did that provide and more of an indication of the direction of the move.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the results of the study and see whether the previous directional movement to an earnings release can tell us anything about what will be the directional movement of this earnings release.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.