Selling Stocks Before Earnings | Podcast Episode #250

0:07
Hey, I’m Ryan Mallory, and this is my swing trading the stock market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trade in the stock market, and today’s episode is gonna be a good one. We’re gonna talk about trading stocks leading up to earnings. Now, for most of you guys, you know that I don’t like holding a stock to earnings and never will.

0:44
But what’s my rules as the stock gets closer and closer to earnings? My selling the day of, the day before, etc. So today’s email, we’re gonna talk about that. So the email that I have for today’s episode comes from a fellow named Herb. Now, that’s not his real name, that’s just the Florida redneck name that I give him so I don’t have to use his real name.

1:02
But Herb writes. Hi Ryan, huge fan of your podcast. I’ve learned so much from you over the past several months since listening. I’ve been trading since last April, and thanks to you and teaching me how to manage risk. I’ve never had a loss bigger than 8.24%! No blowing up accounts for this guy.

1:19
My question for you is how to handle earnings with active trades. I recently had a trade that was doing very well, that I had to cut shorter than I would have liked because of earnings. It’s painful, but I know it’s better. In the long run to stay disciplined, the trade itself was still valid and never hit my stop loss or even came close to it.

1:36
The last two trading days before earnings, the stock dropped by more than 1.5%. Have you ever noticed any pattern with earnings? Is it best to get out two days before earnings? Does the last day before earnings usually go one way or the other, or is it pretty much anyone’s guess? Thanks for all you do, you’ve helped me so much, and I’m sure countless others can say the same.

1:55
Keep it up. Herb. All right, Herb, appreciate the kind words and a very well thought out question. Now, before I get to his question, what am I drinking? Well, I’m drinking some Hayes Parker bourbon whiskey. I’ve had Hayes Parker small batch before but not Hayes Parker bourbon.

2:12
So. I wasn’t a fan of the first time that I had Hayes Parker. I gave it a 3.3. I’m a little bit biased going into this, assuming that it’s not gonna be that great, but I’m open to be surprised. Now, when I smell it, it does give off a little bit of a unique lemon flavor to it. I can definitely pick up on that, but ah.

2:30
The taste, taste is not gonna happen for me, man. Taste has that floral flavor and the last time I tasted a floral flavor, that strong was Willet and will it sucks, man. Willet is really bad. I feel like when I’m drinking Willet, I might as well be grabbing a fistful of wild flowers from the side of a road on I-95 and start eating them.

2:52
I mean, it’s really that bad. I just, I don’t like that floral flavor and I don’t taste it that much, but this Hayes Parker. This one has that same freaking flavor and it is bad. And to explain to you how much I hate that flavor, the Willet bottle this past week and fell on the ground and started spilling.

3:11
I was like, yeah, I don’t care. I’m not gonna drink that stuff unless somebody else wants to drink it. I hate it that much. I could care less that I dropped that bottle. The bottles actually cool. It’s the contents of the bottle that sucks. But nonetheless, that floral flavor just doesn’t work for me. Scale of 0 to 10, I’m gonna give it a 41.

3:28
I just can’t go any higher. It’s actually higher than the small batch one that I gave many episodes ago. That was a 3.3. This one’s a 4.1. That’s as high as I can go. So, back to Herb and his email. So one of the things that I pick up first, and if you’ve been listening to me do these emails for any amount of time, you know that I try to pick up on other things that aren’t just related to the question, but might show some weaknesses or strengths that he should be aware of.

3:55
And in Herb’s case, he said that I’ve been trading since last April and thanks to your teaching and showing me how to manage risk, I never had a loss bigger than 8.24%. No blown up accounts for this guy. So that’s amazing. That’s really good. And the fact that you’ve been able to keep all your losses under single digits, that’s even more impressive.

4:13
Is it likely to last forever? No, I mean, there’s gonna be times where you’re in a trade, a swing trade, and you might even have like a 3 or 4% stop loss and you might take a 10% loss on it just because there’s some bad news event that you just were not expecting or couldn’t even predict for that matter, and it just hits your swing trade.

4:30
That is a reality of trading. So while it’s bound to happen, I hope it doesn’t end. You should be proud of yourself, at least to this point in time, you haven’t had one of these bad trades. Now, just because you’re disciplined now, doesn’t mean that you will always remain disciplined.

4:46
That kind of sounds mean that I’m saying that, or it’s almost like doubting your ability to sustain the discipline. I want you to sustain the discipline, but as you go through different markets and through different trials, like right now, there’s a lot of people that are losing their discipline that are thinking to themselves, this market has sold off so many times in a row, so many weeks in a row.

5:05
I think at this point we’re up to 7 straight weeks in a row, something that’s only been seen 3 other times in history, and now we’re getting it again. So we’re in uncharted territory and a lot of people say, screw it, I’m not going to use my stop so I’m tired of getting stopped out, and they’re afraid that it’s gonna just bounce back up without them.

5:23
Well, the fact is, when it comes to trading, you’re going to get stopped out of trades plenty of times and you’re gonna watch them go right back up. It’s a frustrating part of trading, but when you think about it, a stock can only go up or down once you get out. It’s not like it just remains in place or tanks after you get out just because you did get out.

5:39
The market doesn’t care that you got out. And so whether you’re in a trade or not, the market’s gonna do with that stock what it wants to do. But you’re going to find yourself, Herb, being tested as time goes on. I wish I could say that I have always been disciplined in my trading my entire life, but I haven’t.

5:57
There’s been times where I have let the risk run rampant and I’ve made bad decisions. Luckily, I’m still here trading today, but I can look back on trades from many, many years ago, you know, 15+ years ago. I can remember going back to the dot-com bubble where risk management wasn’t even in my repertoire.

6:15
So you have to make sure that when you are being tested and you are feeling those doubts come about saying, do I really want to follow these stop losses? Maybe I should just hold it for another week, close my eyes and just see where it’s at after a week’s time. Don’t even pay attention to the stock market. Just come back in a week and see what it did.

6:31
Those are the kinds of decisions that ultimately get you in a lot of bad situations because let’s say you did that and you just close your eyes and you came back in a week and say, oh look that. Hey, stock rebounded, I’m in the profit. I’m gonna go ahead and book my profits and let’s say you booked it for a 10% profit.

6:48
What’s likely to happen the next time you’re tested? You’re going to become undisciplined again. But let’s say that you became undisciplined, you closed your eyes and just let the stock run its course, and when you check back in on it again, it was profitable. So you sold it again, so you’re 2 for 2 and you’re thinking to yourself, I might actually have something going for myself here.

7:05
But then you do it a third time and maybe a 4th time, and maybe a 5th time, but then you come up on the 6th time and what happens? The stock never bounces. You come back, all of a sudden you find yourself down 30% on the trade. And that happens, and that’s usually what does happen to people is they get lulled into a false sense of security with their trading that they can be undisciplined and get away with it, and then it’s that one trade that’s going to burn them.

7:28
So my message to traders like Herb would be, hey, you may not have taken any big losses yet, but when you get tested, that’s when you really have to be the most careful. That’s when you have to really dig your heels in and say, I am going to be disciplined even when I don’t want to be.

7:44
Because right now in this kind of market. I’ve had a couple of trades that I got stopped out of, and I didn’t like it. And yes, the thoughts run through my head and I should just ignore the stop loss. Even today, 30 years into it, those thoughts run through my mind. The good thing is, is that I realized that those are my emotions, those are my feelings, and that I cannot let those guide me.

8:07
I realized that those are feelings that are ultimately going to do me in if I follow them. So, to Herb, be careful out there. Now, for his actual questions, and this is about trading earnings. He’s in a trade, he’s making some profits and he doesn’t want to get out of them.

8:24
But he remains disciplined and he cuts the stock trade short because of the earnings that are coming up. Now, a couple of things, he’s kind of curious, when do I sell them? Typically, I would hold a stock no later than the day of earnings. So if they’re having like an afternoon earnings release, then I sell it no later than the day of.

8:41
If there’s a morning release, then I sell it no later than the day before. However, I’m starting to change my tune a little bit on that, mainly because of how many leaked earnings there’s been of late on the day of trading, and I don’t want to be nailed by that anymore. So it’s not a hard rule, but more times than not going forward, you’re going to see me booking profits at least the day out, not the day of.

9:05
I want to at least be getting out of the trade the day before just because of the fact that we’ve seen so many of these early releases on the earnings reports, and it’s mind boggling how often it’s happening from accidentally tweeting out earnings results or people just leaking it to a newspaper source.

9:23
It’s wrong. I hope they catch the people who are doing it and they fire them for it. But the other thing too is is that I don’t want to be in a trade thinking that the earnings are coming out and then having a good trade get instantly destroyed because somebody leaked out those earnings. So my new but not so hard rule going forward is that I’m going to get out the day before an earnings report.

9:46
And the problem with holding the day of earnings too is that if you hold the day of and the stock sells off, there’s no real opportunity for you to be able to make that money back because you have earnings after the bell. So you’re just basically watching every time the stock drops, you’re just losing that money if it doesn’t come back before the end of the day, you’re stuck with that loss or that pullback.

10:08
You can’t wait it out for it to go back up if it doesn’t hit your stop loss. So that’s kind of the other bad thing about waiting to the day of. Because you have no opportunity to make it back up unless you want to hold the earnings, and we know that can just lead to a complete disaster if you do. So what about the fact that I don’t hold a stock through earnings?

10:24
Why don’t I do that? Well, for one, you have a whole department of analysts that might follow like one specific stock on Wall Street. You might have JP Morgan might have a whole team of people that just follows Apple or Tesla or Netflix or Facebook, and they’re talking to different companies that are suppliers for them and they’re getting ideas for how many widgets have they ordered during the quarter.

10:47
They’re trying to figure out how well the company is doing by contacting suppliers. They get sources, they talk to CEOs, they talk to CFOs. These people are in the know and so they provide their expectations for what they think the earnings will come in at.

11:02
And how often do we see an earnings report that comes in right at where analysts expected it to come in at? Usually they’re completely wrong on their reports, and these are people that have access to all the resources out there. They have teams of people that are following just one stock. And they can’t do it.

11:17
They can’t do it accurately at all. In fact, I think Wall Street analysts are some of the worst predictors of earnings I’ve ever seen, and that’s basically their job. So as an individual who has far less resources at my disposal, why am I going to try to do what they can’t do and do it better?

11:34
I don’t have a team of people. I don’t have secretaries or analysts that help me come up with my numbers. So it’s better for me not to play the earnings at all, because I can’t predict what the earnings are going to do. So, even if I can predict what the earnings are going to do, is it going to necessarily beat expectations?

11:52
And if it beats expectations, does that necessarily mean it’s going to rally? No. How many times have we seen, especially this year, where the stock has incredible numbers and it just tanks, completely tanks. And so even if you’re good at predicting what a stock’s going to do from a numbers basis, it doesn’t mean that you’re gonna be able to nail the reaction correct.

12:12
And even if you can get a majority of them done correctly, the ones that you miss can be just so destructive for your portfolio that you don’t recover. Let’s say you can predict 9 out of 10 earnings reports accurately. Well, that one might be all it takes to completely wipe out your portfolio.

12:28
I mean, look what we’ve seen of late. Who would have thought Target would have dropped 27% in a day from an earnings report? Not me. I’ve never seen it drop that much, or Walmart dropping like 12 or 13% in a single day from their earnings. That’s kind of like unheard of moves from earnings, but yet it happens.

12:45
And those are the kind of moves that can wipe out 9 or 10 good trades and leave you in a massive hole. So I feel like predicting earnings is impossible. I don’t think there’s any real way to predict how a stock’s going to react. And even the day of leading into the earnings report, it’s very difficult to predict how that stock’s going to react there as well.

13:03
It’s gonna probably be guided by a lot of sentiment on the day of earnings prior to it being released. But even then, how are you going to predict what the sentiment’s gonna be heading into the day of earnings? So to answer Herb’s question, like, have you ever noticed any patterns with earnings? Is it best to get out two days before earnings?

13:19
I just think for me, I don’t want to be trading it anymore the day of. I’ve seen too many leaks that have taken place over this past quarter to where it’s like, OK, I don’t want to be stressing about that the day of, it’s better for me just to go ahead and get out the day before. It doesn’t mean that it can’t happen the day before as well, but I feel like the odds of it happening dramatically decreases.

13:41
And the last day before earnings, does it go one way or the other, it’s pretty much like the same question that Herb asked just a second ago about the patterns. There’s no real way to predict what it’s going to do the day of, just as much as there’s no real way to predict how it’s going to do the day after. The one thing that I’ve seen at times is maybe in the last 15 minutes, you can see some heavy volume coming into a trade.

14:02
And it can be very abnormal, like a big reversal in price action in 5 minutes of trading or the last 10 minutes of trading, and that can be equated to maybe somebody knowing what their earnings are going to be, and they’re doing some insider trading. I’ve seen some really whack option plays right before earnings and it’s like, they wouldn’t have made that call unless they knew what the earnings report was going to say.

14:19
So you do have a little bit of that that probably does go on more than we realize, but overall as a retail trader, it’s just kind of crazy to try to play those earnings because we don’t have the research to back us up. But I can tell you what is some really good research to get your hands on.

14:36
swingtradingthestockmarket.com. That’s where you’re gonna get all my stock market research each and every day. That’s going to include updates on all the FANG stocks plus Tesla. You’re gonna get index updates throughout the week, plus you’re going to get my weekly watch lists and list of trade setups that I’m following each and every day.

14:53
That’s at swingtradingthestockmarket.com and in the process, you are supporting this podcast. So, to summarize what we’ve talked about here, do you play earnings? I think it’s a horrible idea to be playing earnings. I think it’s one of the worst things we can do as traders. I know people all around me that love to play earnings, but it’s more of a gambling approach.

15:09
It’s like this Las Vegas mindset to where they’re not so much interested in being long-term profitable, even though they like to be. It’s more about they’re trying to get rich fast and they’re trying to stroke their ego in the process, which I would say is a really bad idea because trading earnings, yes, you can be really right on some of them, but it just takes one really bad one, like what we’ve seen with Facebook and Netflix, and then you turn into a bag holder and thinking, OK, I’m just gonna turn this into a long term investment and it’ll turn itself around and like what we’ve seen with Facebook and Netflix, have they turned around?

15:40
No, they just keep getting worse and worse. And then when it comes to how soon before the earnings report would I sell my trade, I’m gonna do it the day before. So if it’s reporting in the morning, I’m gonna do it the day before that, or if it’s reporting in the afternoon, I’m gonna still sell it the day before as well.

15:57
That doesn’t mean that I won’t ever allow it to run into the day of. That’s why I say it’s not a hard rule, but for the most part, I don’t see any reason why I would let it run into it. I just don’t want to make it so hard that I’m completely inflexible if the right opportunity comes along. Most of the time they’re not going to leak their earnings reports out, at least that’s what the historical standard has been, but I’ve seen a higher frequency of it lately, and it’s enough for me to say, on the whole, I don’t want to be holding a stock the day of earnings prior to its release.

16:25
And also remember, just because you haven’t blown up an account yet or you have a streak in place of not blowing up an account, doesn’t mean that you can’t blow up your account down the road, especially when you’re in some very difficult times and you’re emotionally beaten, you’re downtrodden, and you just need a break and you’re tired of being stopped out, you’re tired of being disciplined.

16:46
Guess what oftentimes happens. That’s when you’re most susceptible to become undisciplined. So, make sure that just because you’re disciplined right now, understand that as a human being, it’s still very possible that you become undisciplined and you have to guard against that.

17:02
And if you enjoyed this podcast, be sure to leave me a 5 star review. Those really do help out. They really help continuing to support this podcast and let me know if you have any questions, ryan@shareplanner.com, love to hear from you guys what you have to say and just love engaging with you guys and getting your questions. They make for some of the best podcast episodes.

17:19
So be sure, send me your questions, ryan@shareplanner.com. Check out swingtradingthestockmarket.com. Thank you and God bless. Thanks for listening to my podcast Swing Trading the Stock Market. I’d like to encourage you to join me in the SharePlanner Trading Block where I navigate the stock market each day with traders from around the world.

17:41
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18:03
If you have any questions, please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.