Chris Johnson

   

It's all About Expectations … Yours

Earnings are the truth serum for a business built on lies, hype and hysteria. Quite simply, if you can separate truth from fiction before earnings are "confessed," you can double -- even triple -- your money. And you can do it in as little as two or three days!

Forecasts made just weeks ago already look ludicrous. Guidance given confidently before the bailout is already irrelevant. And in the next few weeks, almost every CEO of every publicly traded company in the land will get in line outside the Earnings Confessional and tell the truth to the world.

So how do you know what stocks are going to move? The answer lies in expectations.

It's not about whether a company beats earnings estimates; it's whether they beat the market's expectations. This is a time when the reaction to news is more important than the news itself.

From a 'Whisper' to a Screaming Buy (or Sell)

Although analysts go on record with their expectations (or lack thereof) of a company's quarterly performance, even if you're listening closely, you're only hearing half the story. The "whisper number" is the off-the-record earnings-per-share (EPS) estimate that Wall Street professionals come up with and perhaps share with their favored clients.

We've all seen a stock drop in price despite an earnings report that met or even beat expectations. Or one that rallies furiously after merely meeting expectations. Why does the stock seemingly move against the fundamentals?

The answer is often contained in the differing sentiment environments surrounding the two stocks prior to the event. In one case, the sentiment may have been excessively bullish heading into the event, which creates high expectations of a blowout report.

This also creates what is called a "crowded trade," which leaves little money to flow into the stock after the earnings release, no matter how positive the report.

Here's the trading tip you need to take away from this: A stock with relatively low expectations stands a good chance of rallying, as there is plenty of sideline cash available to boost the price.

Conversely, high expectations (i.e., the crowded trade) can put downward pressure on a stock, as there is little to no sideline cash to drive the price higher. In fact, the path of least resistance for cash is to flow out of the stock, resulting in declining prices.

How We Tripled Our Money in 4 Trading Days

A perfect example of this is a trade we just closed in an agricultural player that served as fertile ground for a solid, earnings-based play with put options.

Find the Best Times to Trade Options

There are certain times to circle on your calendar when there are more options opportunities than usual to take advantage of!

Outsmart the 'Dumb Money' With Profitable Earnings Trades

Everyone wants to follow what they perceive as the 'smart money.' But don't confuse those players with the 'dumb money' -- because you can make BIG profits off of their foolish bets!