Ever heard of the old Wall Street adage, "buy on rumor, sell on news"? You most likely have and, in my opinion, it applies more to earnings season than anything else. Wall Street firms send their analysts out to meet with management teams prior to the end of their quarters. After the quarter ends, companies enter "quiet periods" leading up to their earnings announcements and management teams are not allowed, by law, to discuss performance with Wall Street. So research teams at these firms return just prior to quarter-end and begin buying stocks leading up to actual earnings announcements. Since most companies report on a calendar quarter basis (March 31, June 30, September 30 and December 31st), earnings results typically begin to hit the Street around the 3rd to 4th week of the following month. These pre-earnings advances are FACT, not my speculation. Historically, the S&P 500 performs extremely well in the early part of months that follow calendar quarter ends. Here's the annualized return of the S&P 500 over the past 70 years for the periods reflected:
- January 1-18: +14.20%
- April 1-18: +28.74%
- July 1-18: +24.79%
- October 1-18: +14.48%
The average annual return on the S&P 500 since 1950 is approximately 9%. The "pre-earnings" periods above are all well in excess of the 9% average annual return. This helps to prove the "buy on rumor" theory.
The next thing that you should be aware of is that growth stocks (IWF) have been favored over value stocks (IWD) throughout the past few years, especially in 2020. This ratio (IWF:IWD) perfectly illustrates this market preference:
The relative uptrend remains in play and we just bounced off the uptrend line. The green-shaded areas reflect the last three "pre-earnings" periods. While we have seen some relative volatility, in each case the ratio ended higher than it began. That tells me that I want to be looking for leading growth stocks in leading industries for possible pre-earnings surges.
Here are 3 stocks to consider:
UPS:
INOV:
AMD:
All three are in strong industry groups and INOV and AMD are leaders within their respective industries. UPS has performed well, but it just began to bounce on a relative basis off of support. Given the earnings report of FedEx (FDX), I believe we'll see another blowout on UPS. Don't be surprised to see traders stocking up on its stock prior to earnings.
On Saturday, September 26th at 11:00am ET, I plan to host a FREE webinar discussing "short squeeze" stocks - both prior winners and current candidates. Everyone that attends will be given access to our entire Short Squeeze ChartList, which represents the 72 most heavily-shorted U.S. stocks. If you're a StockCharts.com Extra or Pro member, I'll show you how you can download this ChartList directly into your account. For more information and to register, CLICK HERE. We'll send out room instructions to everyone in our EB.com community, including our EB Digest subscribers, on Saturday morning prior to the webinar. If you're reading this article on Saturday morning at 9:00am ET or later, you can go directly to our website (www.earningsbeats.com) and click on the link to our room. We'll add you to our EB Digest. If you read this after our webinar, we'll send out a webinar recording to our entire EB.com community, so no worries there.
Happy trading!
Tom
