How Earnings Season Can Affect The Market

Apart from the naturally occurring climatic seasons

, those take place over the year, there are severalmanmade seasons that occur at predetermined frequency. For instance, a resident of Chicago would be familiar with construction season for the long traffic jams that it usually brings about. Fishermen from Florida would know of fishing season and, more importantly, the storm season to find the best catch. Companies have peak business seasons to capitalize the demand, farmers time their harvest seasons to boost their crop yieldand similarly, the financial markets have earnings season.

An earnings season is a period of roughly a month that immediately follows each concluded quarter of a year. Accordingly, there are four such periods that fall in the months of January, April, July and October. During these periods, the companies that are listed on the stock exchangemake their quarterly/yearly earnings and revenue statements available to the public.These seasons are perhaps the busiest time of the year for market experts, especially whobase their trading onfundamental analysis.An earning season can provide the trader with significant cues on a stocks or the markets future price movement. Which is why theyusually observe high price action and high volatility, indicating that the market sentiment over the stock has changed following the data release.

The earnings data is important because it offers the trader vital information about the health of a company. It goes without saying that a strong earnings result is an essential element for the growth of the companys stock. Any inconsistencies or discrepancies within the statements can attract strong reaction from the market and can dramatically affect the price of the stock. Further, It also illustrates key achievements and exposes failures of the company during that period. For major stocks, a collective fall in earnings can reveal tough economic conditions around a specific sector or the market in general. Conversely, a collective increase is a indication of healthy financial and economic conditions.

Each season is seen as excellent trading opportunity by investors and traders alike. Usually, within minutes of a companys earnings data release, its stock can post substantial increase or dramatic decrease depending on how market interprets it. Market analysts usually compile a set of predetermined estimates, also known as the street estimates, before the release of the data.Once the data is released, these estimates are compared to the actual result. If the predications are at par with earnings results, the stock will not see much movement, however,due to complexities involved in determining precise estimates, this is less likely to happen. In case the company beats the street estimates, its stock will see an advance. Conversely, a weaker than expected earnings can result in fall. In either case, itprovides an excellent trading opportunity that can give quick returns and that too with low risk.

Further, the stocks that mark substantial increase or decrease intheir earnings or other derived fundamentals will be extensively studied and discussed over news channels, in written reports and other media. This gives the stocks some extramedia coverage while simultaneous discussing strategies to buy or sell signal them. The increased coverage in turn gives way to higher investor interest, which further constitutes into high volume of trades.

To conclude, earnings season is an all-important season that measures the health of a stock/market and gives the investor an idea of its future price movement. It usually brings about significant price action, high volume of trades and high volatility. Considering its potential to give great returns, it is probably the best time for trading stocks in the market, preferably on short-term basis.

by: Gerald Rickman

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