by Ryhearst
Summary
With 494 of 497 S&P companies reporting, 2Q earnings reactions have been generally positive 1 day after earnings but stock prices seem to reverse 5 days after earnings. At a sector level, only Utilities have positive momentum after earnings (showing a stronger positive reaction 5 days after earnings compared to 1 day after earnings). 8 of 11 S&P sectors show a price decline 5 days after earnings, and this is also true for the S&P as a whole.
For this quarter, the average price move for all S&P sectors 5 days after earnings is over 1% lower than the average price move 1 day after earnings.
Is this a sign that investors are unhappy with the earnings results? Probably not. The 1d reaction (+0.28%) is very similar to that of 2Q last year (+0.30%), but price reaction at 5d this quarter (-0.83%) is demonstrating an unusual reversal in momentum compared to the 5d reaction of 2Q last year (+0.59%). This big dip after earnings are released could suggest that people are selling the news and fearing “peak earnings” have already arrived.
| S&P Sector (2Q 2019) | Price 1d after earnings | Price 5d after earnings | 5d – 1d difference |
|---|---|---|---|
| All Sectors (avg.) | +0.28% | -0.83% | -1.11% |
| S&P Sector (2Q 2018) | Price 1d after earnings | Price 5d after earnings | 5d – 1d difference |
|---|---|---|---|
| All Sectors (avg.) | +0.30% | +0.59% | +0.29% |
Compared to 1Q 2019, earnings growth has slowed somewhat across certain sectors such as Tech and Consumer Discretionary, while other sectors such as Energy and Materials have rebounded slightly.
If there’s anything to take away from this analysis, it’s that Real Estate has a sales growth of 4.20%.
sooo.. calls or puts?
If you think this trend of weakening earnings will continue into next quarter, short stocks/buy puts 1 day after companies release earnings and cover 5 days after the earnings.
Or if you think this discussion is totally meaningless, inverse the above: buy stocks/buy calls 1 day after companies release earnings and sell 5 days after earnings. The above trend didn’t appear in 2Q last year nor during the Great Recession of 4Q 2018.
Either way, by playing this strategy instead of buying puts/calls before earnings, you’ll be swapping vega (IV crush) for 4 days of theta (time decay). You can also choose to sell options/spreads to take advantage of the delta move while collecting theta premium instead.
Do your own DD before entering a trade. This post is at best a suggestion to look further, and if you blame me for losing money, I’m going to laugh at you.
Limitations / Ideas for more DD
- I did some unrelated analysis at the sector level, saw this, and wanted to share the possible trade idea. However, it’s totally possible that the sector on average is way down but one stock within the sector ignores the trend.
- Yes, we all know past performance doesn’t mean shit.
- I didn’t go that far back in time. It’s likely that this similar pattern happened in 2016 due to the decline in earnings back then; if you do decide to research further, feel free to share your results.
- I did not backtest this strategy for P&L/winrate. It’s actually a really good idea to do that at the individual stock level.
- This doesn’t factor in the possibility of tweets.
- This isn’t a buy and hold play. If you want some suggestions of undervalued sectors for the long-term, I’d check out Financials, Energy, and Health Care.
Charts and shit
2Q 2019 Earnings Surprise by Sector
2Q 2019 Earnings Growth by Sector
2Q 2019 Price Reaction by Sector – 1d
2Q 2019 Price Reaction by Sector – 5d
| S&P Sector (2Q 2019) | Price 1d after earnings | Price 5d after earnings | 5d – 1d difference |
|---|---|---|---|
| Energy | +0.66% | -2.08% | -2.74% |
| Materials | +0.85% | -0.71% | -1.56% |
| Industrials | +0.46% | -0.44% | -0.90% |
| Consumer Discretionary | -0.41% | -1.50% | -1.09% |
| Consumer Staples | +1.56% | +0.38% | -1.18% |
| Health Care | -0.41% | -1.77% | -1.36% |
| Financials | +0.68% | -0.03% | -0.71% |
| Information Technology | -0.07% | -1.09% | -1.02% |
| Communication Services | +0.21% | -2.57% | -2.78% |
| Utilities | +0.12% | +0.62% | +0.50% |
| Real Estate | +0.67% | +0.49% | -0.18% |
| All Sectors (avg.) | +0.28% | -0.83% | -1.11% |
Here are the earnings reactions from 2Q last year – notice how generally speaking, earnings momentum from 1 day to 5 days after remained positive:
| S&P Sector (2Q 2018) | Price 1d after earnings | Price 5d after earnings | 5d – 1d difference |
|---|---|---|---|
| Energy | -0.40% | -0.68% | -0.28% |
| Materials | +0.63% | +1.62% | +0.99% |
| Industrials | +2.26% | +2.69% | +0.43% |
| Consumer Discretionary | -0.11% | -0.18% | -0.07% |
| Consumer Staples | +0.59% | +1.18% | +0.59% |
| Health Care | +0.15% | +0.25% | +0.10% |
| Financials | -0.32% | -0.35% | -0.03% |
| Information Technology | +0.33% | +0.69% | +0.36% |
| Communication Services | -1.47% | -0.97% | +0.50% |
| Utilities | -0.25% | +0.63% | +0.88% |
| Real Estate | +0.40% | +1.10% | +0.70% |
| All Sectors (avg.) | +0.30% | +0.59% | +0.29% |
I didn’t save snips of the 3Q/4Q 2018 results, but here they are – notice how this trend didn’t really happen even though stocks were way down during Oct-Dec.
| S&P Sector (3Q 2018) | Price 1d after earnings | Price 5d after earnings | 5d – 1d difference |
|---|---|---|---|
| All Sectors (avg.) | -0.01% | +0.44% | +0.45% |
| S&P Sector (4Q 2018) | Price 1d after earnings | Price 5d after earnings | 5d – 1d difference |
|---|---|---|---|
| All Sectors (avg.) | +0.82% | +2.06% | +1.24% |
Bonus screenshots for ECSU nerds like myself – concern regarding the economy seems to be more focused on businesses rather than the health of the consumer:
Disclaimer: Consult your financial professional before making any investment decision.