The Market’s Most Predictable Profit Window
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Michael’s note: Most investors look at an upcoming earnings report and see a black box… where even the best of Wall Street’s analysts are throwing darts with a blindfold on.
But today, TradeSmith’s own Landon Swan, who heads up our Earnings Season Pass advisory, argues that earnings season is actually the most predictable profit window in the market.
Below, he breaks down why Google’s recent blowout quarter still sent the stock lower… How he and his brother and cofounder, Andy, learned to read consumer demand before it ever reaches a company’s books… and why a single decision by Elon Musk has this fall’s season setting up bigger than usual.
Last week, Landon and Andy held a free briefing on where that money is heading and how they plan to trade the season — and the replay only stays up until Oct. 6. Watch it here before it comes down.
Here’s Landon…
This summer, Google (GOOGL) beat every number Wall Street threw at it. Its stock price fell anyway.
Cloud revenue had grown 82% in a year. The company beat every profit and revenue target analysts had set. Yet in the days after the report, the shares fell more than 7%.
A lot of smart people watched that happen and decided the market had lost its mind. How does a company crush its numbers and still lose ground?
But the market hadn’t lost its mind. It was following the most dependable rule there is.
Once you understand that rule, earnings releases stop looking like chaos and more like reliable trading opportunities.
Here’s what makes them different from almost everything else that moves a stock. A market crash, a Fed decision, a shock headline – none of those give you any warning. Earnings do. Every company announces the exact date, months ahead.
When you trade earnings, you don’t have to react to a big move that comes out of the blue. Instead, you can prepare for an event you know is happening – and decide how you’ll play a stock before it reports.
So today I’ll show you why a quarter this good sank Google’s stock – and how the same rule points to the most predictable profit window in the market.
I hope you’ll stick with me to the end. Because this fall, that window is about to open wider than usual – due to a single decision by the world’s richest man, Elon Musk.
Priced for Perfection
So why did Google’s share price drop after it reported stellar earnings?
Because by the time it reported, a great quarter was already priced in.
For weeks beforehand, analysts had published their forecasts. Traders had bought in, betting those forecasts were right. All of those expectations were already baked into the share price.
So when Google delivered the strong quarter everyone expected, there was no fresh reason to pile in. The traders who’d bought in early, betting on a good report, had what they came for. They sold. And a stock priced for perfection slipped the moment it merely met the bar.
Which points to something most investors miss. A stock doesn’t move on whether the news is good or bad. It moves on the distance between what actually happens and what everyone already expected. The bigger that gap, the bigger the move.
I learned that at a racetrack, years before I ever traded a stock.
When my brother Andy and I were kids, our grandfather used to take us to the track in Kentucky. And the first lesson the track teaches you is that you don’t make money betting on the best horse. You make money betting on the horse the crowd has underrated.
The favorite can win the race and barely pay you a thing, because everyone already expected it to win. The money is in the gap between what the odds say and how the race actually runs.
A stock reporting earnings is no different. The odds are the expectations baked into the price. The race is the report. And the payout is the distance between them.
These Moves Happen on a Timetable
Here’s what makes earnings the best version of that bet. It runs on a timetable.
Four times a year, every public company in America has to open its books. Regulators require it. And every one of them announces the date in advance.
You can circle that date on a calendar. You know when a stock has its best shot at a major move, weeks before it happens.
And these are major moves. Researchers at UC San Diego measured what happens in that window down to the millisecond, across almost 90 billion after-hours quotes. Right after a company reports, they found close to a 90% chance of a big move. At any other moment, under 4%. They described what a stock does in that window as traveling at “warp speed.”
An older study found a stock can move as much as 67% more during its earnings week than a normal one.
Most of the year, the market drifts. Then, on these few scheduled days, it lunges.
Knowing when the window opens is the easy part. Knowing which way the stock will jump is the hard part.
Spotting Big Moves Before They Happen
That question is the one Andy and I have spent our careers answering.
You may have seen us on CNBC, Fox Business, or in Barron’s and Forbes. Or you may have come across us here at TradeSmith.
We’ve spent decades spotting big moves before they happen. We were watching Nvidia (NVDA) before it was a household name, and it’s up 50 times over since it first hit our radar.
None of that came from reading earnings reports. A report is three months stale the day it lands. So years ago, we built something to see the move sooner. It reads what hundreds of millions of ordinary people are buying, searching for, and downloading, day after day, long before any of it reaches a company’s books.
Hedge funds have paid as much as $750,000 a year to see what it sees. A team at Georgetown studied it across roughly 2,000 companies and found it could accurately predict their sales. Barely a year after we built it, the tool was named one of the World’s Top 10 Most Innovative Companies.
Here’s why that matters. When our data shows demand for a company running hotter or colder than Wall Street expects, we have a strong read on which way the gap will break before the report ever comes out. So we get in position ahead of it.
On average, our successful trades have nearly doubled readers’ money in five days or less.
A few recent ones:
- Starbucks (SBUX): 96% in three days.
- American Eagle (AEO): 102% in three days.
- Netflix (NFLX): 112% in four days.
- United Airlines (UAL): 113% in four days.
- Crocs (CROX): 135% in four days.
- Chipotle (CMG): 143% in five days.
- Coinbase (COIN): 216% in five days.
- Tesla (TSLA): 268% in three days.
- Lululemon (LULU): 370% in five days.
Same story every time. Our data caught the shift in demand before the crowd did, we positioned ahead of the report, and the stock sprinted the moment the numbers proved it out.
The Next Window Opens October 5
That’s when earnings season begins. Hundreds of companies open their books over the weeks that follow, and the whole pattern starts again, on schedule, right on the calendar.
But this season is set up to be bigger than usual, for one reason: a single decision by Elon Musk.
This summer, Musk took SpaceX (SPCX) public and walked away with close to $100 billion he didn’t have a few months earlier. He’s been blunt about where it’s going: into the race to build AI. And this fall, for the first time, that money starts showing up in the earnings of companies most people would never think to watch.
Last Thursday, we hosted a free briefing to walk through where this money is heading and how we plan to play the season. This window is only open until Oct. 6, and space is limited. So watch the presentation here now before the opportunity closes.
Which companies, and where the money lands first, is exactly what Andy and I have been mapping. We’ve already drawn up our list. We’re not going to name them here, because that would spoil it for those who attend.
Here’s what I hope you’ll take away from this. The next time a great company posts a great quarter, and the stock falls anyway, you’ll know it isn’t the market losing its mind. It’s the gap doing its work. And you’ll know the thing most investors never stop to think about: exactly when that gap gets settled.
It’s on the calendar. The next window opens Oct. 5.
Cheers,
Landon Swan
Senior Analyst, TradeSmith
P.S. The biggest names on Wall Street already trade around earnings like this.
Some of billionaire hedge fund manager and New York Mets owner Steve Cohen’s largest gains have come from the same underlying approach.
And this past summer, it helped Ken Griffin’s $70 billion fund, Citadel, posted its best month ever.
The difference is they’ve always had the data and the software tools to give them an advantage.
Starting Oct. 5, so do you.