Category: Commentary

I judge for the current market sentiment by the way investors react to companies’ earnings’ reports. When risk-aversion is the popular theme of the day, speculators subconsciously look for a reason to sell. The slightest weakness in an earnings’ call will be exaggerated and extrapolated and the stock will be sold. It doesn’t matter if a company beats the analysts’ estimates or if it guides higher for next quarter. It matters how market participants react to the news. When “good” earnings reports are getting sold, market is in defensive mood and you should act accordingly.

The story is different when investors are confident about their own and the economy’ future. During such times, people are looking for a reason to buy. They tend to ignore any weakness and a single ray of hope in an earnings’ report is enough to get them excited and start buying like crazy. You know the spirit of Wall Street is high, when slightly lesser than expected losses are generously rewarded by double digit one day gains.

Earnings’ season is here and it will provide hundreds of good trading opportunities. I will illustrate a variation of what I am looking for through one of the good trades I had lately in American Greetings (AM).

1) Reaction to news is more important than news itself. I am looking for 10%+ gains on at least 5 times the average daily trade volume.

2) Stock beats estimates by wide margin and guides higher for next year.

3) The breakout is from relatively tight (preferably flat) range – the longer, the better. It is a sign of a neglected stock. Stocks that run up in front of earnings’ reports, tend to be sold on the news.

4) The stock finishes the day in the upper 1/4 of its  daily range. With other words, it forms a nice, long, green candle without too long shades.

5) The low of the first 30 min candle might be used as an initial spot to place your stop. The real winners rarely revisit that point. The best trades are profitable from the moment you enter. Along its way up, the stock will form several bullish flags and wedges and offer opportunities to raise your stops or enter if you missed the initial move.

American Greetings reported a profit after 2 consecutive quarters of losses. The reason behind the sudden green bottom line wasn’t higher sales or margins (typically what I am looking for), but lower expenses. The important part was the market reaction. AM went up 41% on the day it reported it EPS number.

On a side note, the company was paying 48 cents dividend, which before the earnings’ jump accounted for more than 7% annual yield. Dividend is usually the last thing I care about, but in this case it was notably good.

AM earned 25 cents  per share compared to a profit of 27 cents for the same quarter, last year. Normally I look for triple digit Q/Q growth, higher margin and at least double digit sales growth, but in this case we had a discontinuation of a losing streak and a promise of higher margins in the future. To be honest, you don’t even have to put so much effort analyzing those details. The important thing was that investors were buying AM’s shares like they’ll run out of fashion.

There was only one analyst, following the company and he expected revenue of 20 cents per share. Is it possible that a tiny 25% earnings’ surprise (25c vs view of 20c)  can cause an almost 100% move in a matter of a week? In general, anything is possible, but this was only one side of the story. AM has relatively small float – 36.7 mill. I prefer stocks with float below 25 mill or even below 10 mill shares as they tend to move faster. The evening before AM’s report was announced, it had over 20% of its float sold short and a short interest ratio of over 15. The last figure played an essential role in the AM’s gigantic move.

10% of your trades will account for 90% of your profits

1 or 2 months will account for most of your annual profits

1 or 2 days will account for most of your monthly profits

Good investors and traders know that very well. They are ready to press extra hard when realize that they might have a home run in play. They are ready to disappear in 60 seconds when things don’t go as planned.

Gio from IBC knows that rule very well and he pressed on his GMCR investment to achieve 190% return.

Dennis Gartman knows that The Golden Rule is what distinguishes smart from not so smart money:

We’ve learned one good lesson from that one trade, and that is that we only get one or two or perhaps three good ideas each year that work. So, when they work, it is our duty to beat them into submission; to add to them when we can; to embrace them as they insulate themselves from random market noise, and to use them to make up for the myriad numbers of truly idiotic ideas  we are capable of coming up with, keeping those losses small.

Sometimes one good opportunity could turn your life upside down.

 Tonight I was watching STL Cardinals losing shamelessly against Cincinnati and an interesting thought occurred to me. People go to see a game for entertainment purposes. There are three major ways to offer good quality entertainment to the fans (other than being in nice company and overconsuming beer):

1) they see a good quality, exiting game

2) their team wins no matter how

 3) they see a good quality game and their team wins.

 Therefore we might conclude that people are getting more satisfaction and better quality entertainment when their team wins. Higher quality justifies higher price of tickets. Here it is my proposal for every team, who wants to boosts its overall income and fans’ satisfaction.

1) Raise your tickets with 10 to 20% from the current prices.

2) If your team losses during a home game, give all ticket holders the right of 50% discount for the tickets of the next 2 home games. The promotion will work as “first comes, first served” until all seats are sold off. From one side people will get retributed for seeing their team losing and from the other, the owners will sell more seats for the next games. (seats that otherwise would stay empty)

3) If your team is winning at the beginning of the 8^th inning, offer ½ price off on all drinks for the last two innings. By the end of the game, most people have consumed what they usually consume and if you see statistics, only small percentage of the overall sales take part in the 8^th and 9^th innings. Therefore a 50% discount mixed with the euphoria of the coming win would certainly boosts sales. We all know that margins on everything at the stadiums are gigantic, so even after 50% discount, profits will be sizable.