We’re right in the middle of earnings season.

Sure, some of the big companies you’re waiting for may not have reported yet, but after the large banks report, which they did last Friday, earnings season is all systems go.

But have you ever wondered exactly how earnings season works?

If you don’t know, earnings season is the period that happens four times a year when companies report their earnings from the previous quarter. It’s one of the few times where companies are forced to be transparent with their shareholders.

But there’s a whole different game going on below the surface on Wall Street.

Because for each company that is about to report, a series of “expectations” is set up.

Who sets these expectations? The analysts, of course.

Who are “the analysts?” That’s anyone’s guess.

They’re the ivory tower Wall Street big wigs hidden behind fancy names like “Goldman Sachs” and “Wells Fargo” and “Berkshire Hathaway.”

They’re not everyday folks. They’re Ivy League elites and child prodigies who tip the scale of the market.

Because these “expectations” they set have incredible power.

These analysts use a combination of forecasting models, the company’s fundamentals, and the expectations a company sets for itself (which is a whole different game we can’t even cover here) and they tell you what you should expect from an earnings call.

But that’s where your bottom line starts to be affected.

Because when companies disappoint these “expectations,” which are at best well-informed guesswork, the price of a stock can sink.

And on the other hand, when they surpass them, the price of the stock can soar to levels you can’t afford.

The analysts don’t care. They’re playing their own game.

So how can you fight back?

 

In her Earnings Season Playbook, our analyst Markay Latimer recommends a few critical steps: 

  1. Clear the deck — if you’re in long term positions on a company that’s about to report earnings, get out of them! It’s not worth the risk of a potential boost upward to lose everything with a bad earnings call.
  2. Don’t buy balloons — in the week of an earnings call, and in the week after, options prices are inevitably inflated. Don’t buy them!
  3. Be patient and ride the wave — Trading earnings well is a waiting game. Be patient. Wait for a company to pull back after earnings, then turn bullish. That’s when you can enter and ride the wave of continued positive momentum.

Winning the financial war is about little positive steps we can take to win a game that Wall Street is trying to play behind closed doors.

Trading is risky, always, but it’s especially risky during earnings season unless you know what you’re doing. 

Learn Markay’s principles and apply them, and you’ll feel a lot safer about your trading every time earnings come around.