When Should I Sell (Part 2)

Rataan

I posted here previously, asking a similar question, as towhy a share price was falling when its financials seemed to be sound. The consensus from that thread was that thefluctuation in price is down to the herd mentality of the market, and thatthere is no understanding it!

Having said that, I feel I need to ask the questionagain. This week I sold my positions in2 shares, Spirit Airlines (SAVE) and Mednax (MD) because their share pricestarted to drop dramatically, SAVE dropping 8% in one day!
What I don’t understand is that the selloff started for bothas soon as the market opened on the day that their Q1 earnings results were dueto be published. It’s like everybody wasexpecting bad news and just sold everything. As it turned out, the financial results for both companies were quitepositive, with revenue, net income and total equity increasing, but still the selloffcontinued, and is still continuing.
I am new to investing in shares, so I wouldappreciate some advice/opinions from some more experienced investors. I would like to know is it standard practiceto sell off your positions the night before an earnings release in expectationof bad news?

paisley2

Rataan wrote: »

I would like to know is it standard practice to sell off your positions the night before an earnings release in expectation of bad news?

In a word yes, no and maybe

There is no straight forward or simple answer to that, the markets are complex and constantly evolving and changing and the people driving the markets keep changing their minds. Hence there is no 'standard practice'. In the markets you are up against the most well funded and intelligent people on the planet.

Professionals trade different strategies and depending on which they are trading that might involve selling before earnings or holding over earnings. The strategy might involve buying in the weeks and days leading up to earnings and then selling just before earnings are released. This strategy might also be applied to rumours about earnings (buy on rumour and sell on news). Traders might be running different strategies simultaneously based on different time frames, so they might sell one position before earnings and hold another.

You need to have a trading strategy that has been proven to work and know exactly what you will do no matter what happens in the market. You should never be in a position where you have money exposed to the market and you don't know what to do next.

You should be able to analyse the market yourself and come to a solid decision about what you are going to do, without having to rely on anybody else's opinion.
Sometimes that analysis tells us 'I haven't a clue what's going on' and the decision is to Stand Aside and not trade (like I am doing today, hence playing around on a forum).

Bottom line, stop trading and start studying. Take the time, effort and expense to educate yourself. Then slowly begin with a simulated account, once that is showing a positive equity curve for 12-18 months (yes, that long), then slowly being to trade a live account, risking no more than 1% of your a/c equity on any single trade. (That means if you have €10k in your account, don't risk more than €100 on a single trade, €5k allows €50 risk). Keep meticulous records of all your trades, including screen shots of graphs before, during and after the trade. Without good records you are like a punter in a bookies trowing his loosing docket on the floor. If you are loosing, you need to know why. Get a mentor or coach who can correct you as you go long and examine your trades and point out your errors. Stay humble and open and realise you might not be cut out for trading. Not everyone is and there is no shame in that.

If you haven't the patience or discipline to take these simple steps, then you certainly haven't the patience or discipline to be trading.

I will have a look at SAVE and MD later and post on them.

For ever odd

Where can you get a mentor or coach? I would like to talk to someone who I could bounce ideas off and likewise listen to theirs.

paisley2

SAVE & MD reported earnings Wednesday & Thursday.

Anything can happen around an earnings release, just before it, during it or after it. Figures are leaked in advance, estimates are exaggerated or downplayed, companies use the forward guidance in earnings (the most important bit) to front load bad news or influence internal politics, literally anything can happen. I worked for a Plc in the past and whenever the earnings or annual report were released we all agreed it was a great company, just not the one we were working for

A core element of any trading strategy is what to do around earnings. If you don't have a answer to that you don't have a strategy and you shouldn't be trading. You should have flagged the earnings well in advance in your diary. Before you even consider opening a position, check the next earnings release and ex-div day for the company. Then save a reminder in you calendar. Each day when I do my pre-trading preparation I have a field which shows all the earnings reminders I have set and I check these match every position I have open.

Numerous studies have been conducted on the subject of price movement around earnings releases, both personally by traders and investors and by academic bodies. And they all concluded the same thing. Basically its a roll of the dice. Anything can happen and it's often quite dramatic.

Just look at what happened this week alone on a company mentioned in this forum. Twitter (TWTR) were due to release earnings After Market Close on Tuesday evening, but the Nasdaq made a boo-boo and a website got them before the close on Tuesday evening. The price dropped over 25% just before the session ended and they are still dropping as I type, now almost down 30%. Stop Loss orders (if they were even set) were probably gapped over and a lot of people are sitting on big losses. Even traders who planned to close out their positions just before the close were caught. Now, there is nothing wrong with a 25-30% drawdown on a position PROVIDED that is allowed for in your strategy and you have set your risk accordingly. Twitter could very easily go on to recover that loss.

Basically have a plan what to do around earnings and don't let the price movement afterwards catch you by surprise.

For ever odd

@ Rattan

It doesn't matter what the herd are doing, focus on what you are doing. know WHAT loss you are prepared to take and WHERE you are going to TAKE your profit BEFORE you invest/trade.
Plus everything Paisley2 said.
Research, research and more research.

Rataan

I was well aware of the earnings dates, and I did have a plan on what to do. I was keeping a close eye on the prices on the lead up to the earnings releases, and I managed to get out of both positions at my stop loss targets, avoiding further losses with SAVE and even preserving my gains with MD.

I just found it baffling that the SP drops were so dramatic and sudden, especially when it would appear to me that the news from the earnings releases were positive. I would have expected that would mean an increase in SP.

I guess what I've learned here, and what I'll be factoring into my strategy in future, is that I will be selling my positions on the days leading up to an earnings release.

For ever odd

If you check the last twenty reports (5 years worth) you will get an idea if the company is beating/missing earnings estimates. You could look at charts to see what way price action went on each occasion. It's surprising how much easier is it to make a decision on what to do before and after the report.