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Mar 22

Why I Hold Positions Through Earnings

I’ve had a few people ask me this so I thought I’d put my thoughts down on paper. The first thought that enters my head when someone asks why I hold through earnings is “Why wouldn’t I hold through earnings?”, so let’s try and see why I feel that way, because it suggests I see it as an opportunity, but I never consider I’m playing earnings.

It’s definitely an area where people seem to have strong views, and some get very hot under the collar about it. It’s obviously seen as a volatility event, moreover, it’s a scheduled one, so to knowingly venture into it is somehow seen as irresponsible, why would you willingly expose yourself to it?

In a similar vein to earnings announcements, I remember a few years back when trading currency markets, people would try to tell me if you’re holding EUR into an ECB announcement, or GBP into a UK inflation number you were gambling and being reckless.

I just don’t see that at all, because once you start with that line of reasoning where do you stop? Am I to take all my positions off ahead of a Fed announcement, or a payrolls number? What about Wholesale Inventories? No, not important enough?

If I’m long a semi equipment stock should I not only take the position off when it reports, but also when $INTC reports? If I’m long $MA do I take it off when $V reports? Seriously, where does it end? Continue down that route and eventually you get to the point where you shouldn’t have any position on, ever, because anything can happen, at any time.

And that’s what it boils down to. There’s a name for that, it’s called risk.

How you perceive that risk should be commensurate with your timeframe. If you’re typically a daytrader and choose to hold something overnight for the earnings announcement, well, I’m not going to accuse you of gambling, but clearly the volatility relative to your timeframe is far greater for you than for a trend follower.

I cut my losers and let my winners run, so I’m aiming to hold positions for very long periods. The longer I hold it, the bigger a winner it must have been. By the time I’m closing my biggest winners, those earnings will be a distant memory, hopefully several of them would have come and gone, and with hindsight barely noticeable on the chart.

As a trend follower my upside is limitless. The implications of that are all your ideas are not 2:1 or 3:1 risk/reward, they are potentially 10:1, 20:1, 100:1. I have no problem with a stop 10% or more away if the setup suggests it could run higher many multiples of that. My price target for every position is infinity.

Let’s look at some recent examples of stocks we held into earnings, both winners and losers.

Whole Foods ($WFM), closing stop at previous pivot low, poor earnings, sank to previous support, then broke, we exited. It’s only what we would have done regardless of how or why it got there. Earnings was just the catalyst.

AlphaCapture

 

LinkedIn ($LNKD), huge beat and raise, gapped higher. If we were playing earnings wouldn’t we have just taken that 15% jump the next day? Instead we let it run. We still are. It’s trending.

AlphaCapture

 

Hertz ($HTZ), look at that noise, which one is the earnings bar? The third one. The huge black reversal candle. Fortunately for us we ignored it and concentrated on the trend.

AlphaCapture

 

Lululemon ($LULU), long-term uptrend, signs recent consolidation may be coming to an end, clear support and invalidation point just below. Guided lower, broke support, we’re out next day. No problem, on to the next one.

AlphaCapture

 

Nike ($NKE), tight consolidation of recent uptrend, just below all time highs, good support below, earnings imminent. Both support and resistance become parameters of our risk/reward, earnings acted as the catalyst today to make one of those levels a reality. But for us it doesn’t end there, now we let it run.

AlphaCapture

Understand, we are not playing earnings or gambling by holding positions into an earnings announcement, we are playing trends, and as long as we have predefined risk/reward parameters for every position, then earnings are just a catalyst to potentially test them.

Every day brings the possibility those parameters will be tested. Earnings just make it more likely.

 

2 comments

  1. Ben

    Taken to the logical extreme, you should never invest in stocks because it’s basically one massive string of volatility events.

    1. Jon Boorman

      Revisiting this post as earnings season comes round again, love this comment, will likely use it.

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