What causes major volatility during earnings season

Anyone who invests in stocks will likely notice at times there are wild swings in a company's stock price. New investors may not always know why it dropped, but even veteran investors sometimes struggle to explain why it dropped. Often times these major drops happen when the company reports their quarterly financials ("earnings season").

Earnings season is often a more difficult time to be an investor due to the potential volatility that may occur after an earnings report. All good news will cause the stock to rise. Bad or mixed news will cause it to drop, but often times it is a 15-20% or or more price reduction. Even the most cool among us get stressed seeing a 20% price reduction. Is that company really 1/5 less valuable than it was the day before? Remember, the market is always right, but just because today it is worth 20% less than it was the day before doesn't mean it will still be a few days from now.

I believe stop loss orders are why stocks drop so fast when earnings reports happen.  It isn't so much that "everyone had their finger on a panic button", but it is more than there was a few panicky sellers, followed by an automatic cascade effect.

As a result of this phenomenon, I will often times put in limit orders to buy stock in good companies at about 15% below market value a few days before their earnings report. If it drops, I just purchased the stock on a great sale!

 

 

 

This post was originally written on July 22, 2018, and is not intended to convey legal, accounting, investing, or other professional advice. I’m not selling anything. I am not a registered stock dealer or broker or anything like it. I’m just sharing ideas I have in stock market investments. My ideas are subject to change at anytime. I have not been compensated in anyway for any of Mike’s Stock Picks.
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