Market Analyst Offers Two Critical Rules to Remember During Earnings Season

Senior Market Analyst, Chris Johnson of Investor's Daily Edge advises investors of two rules to keep in mind when investing during earnings season.

Delray Beach, FL (PRWEB) April 7, 2007

Next week marks the traditional beginning of earnings season, with Alcoa reporting first-quarter results on Tuesday, April 10. The quarterly ritual typically provides investors with a wealth of trading opportunities, as earnings is the most widely traded event at the company level. The fact that earnings announcements are scheduled events is probably why investors trade earnings season so heavily. Just look at volume, which typically rises during earnings season.

So outside of knowing that trading opportunities pick up during earnings, investors need to ask themselves, "What's in it for me?"

According to Senior Market Analyst of Investor's Daily Edge, Chris Johnson, "...based on my approach, which is rooted in the science of analyzing the market implications of investor actions, I find that this season is one of the more target-rich environments for investors to get clear signals of where stocks are headed."

"Why is this? He continues, "Well, I like to dissect daily option volume, price, and other data points that reflect investors' ambitions for stocks. The fact that the volume of this activity increases around earnings means that the "read" or outlook based on this analysis becomes more robust. Those familiar with statistics can view earnings season as a period that offers more samples, meaning that study results become more reliable.

What should investors look for as earnings approach?

Watch for signs that investor expectations are rising ahead of earnings as a sign that a stock may be at risk of the "sell the news" crowd stepping in after earnings are released. Avoid such situations, because these stocks are likely priced for these high expectations and won't gain much on a positive earnings surprise.

Typically, the situation to look for is a strong earnings report when investors have low expectations. Usually these stocks rally more than average, as the low-expectation crowd bid the price up in a scramble to jump aboard the stock.

Here's a list of "behavioral rules" to remember during earnings season. Write these down and refer to them regularly, as they have stood the test of time when it comes to investing during earnings season.

1. Avoid the temptation of running with the crowd. The crowd tends to get whipped into a frenzy ahead of an earnings announcement, as investors buy in based on overly positive expectations. This means that the stock's price reflects ambitious expectations, which are often difficult to meet. Under such circumstances, a stock that reports positive earnings is more likely to sell off due to its bloated "behavioral value."

2. Look for the under-appreciated opportunities. Keep an eye on companies with low expectations headed into earnings (increased put buying or short interest are a couple of keys). Keeping with the same mindset in rule number one, low expectations are easily beat and investors tend to flock to such stocks once they realize that a buying opportunity awaits (of course, you've already got your seat on the bandwagon).

"As the season plays out, I'll look at a few stocks using my Behavioral Valuation approach that sniffs out high- and low-expectation scenarios." Chris adds, "Until then, watch the business headlines and other sources of investor sentiment as we make our way into the heavily traded earnings season."

For more information and to read the full article, visit Investor's Daily Edge at http://www.investorsdailyedge.com/archive/index.php

About Chris Johnson
Before starting Johnson Research Group LLC, Chris worked in the financial services industry as a broker for 11 years and eight years as Director of Quantitative Analysis and Market Strategist with Schaeffer's Investment Research. Through this work, Chris became an expert at quantifying and studying the behavior of investors and financial markets, market sectors, and indices. Along the way, Chris has developed numerous market analysis tools that harness the powerful combination of behavioral and technical analysis.

Chris is a contributor to Investor's Daily Edge and frequent commentator on financial markets and is regularly seen in national print media, such as Barron's, Wall Street Journal, Financial Times, Bloomberg, USA Today, and the AP Newswire. In addition to being a guest on several radio shows, Chris appears regularly on CNBC, Bloomberg TV, and the Fox News Channel as an expert in the field of sentiment and investor behavior as well as technical analysis.

Investor's Daily Edge (http://www.investorsdailyedge.com) is a free investment newsletter that's delivered by email before the market opens. In each weekday issue you'll receive clear recommendations and practical strategies for protecting your portfolio and multiplying your money -whether the market is rising or falling.

For more information about our editors, or to set up an interview, please contact Wendy Montes de Oca at 561-921-0001 or visit http://www.investorsdailyedge.com.

# # #