The first set of Q4 results will soon start trickling in. Expectations are not high. The two previous quarters saw a slowdown amidst a gradually worsening macro-economic environment. Profits dropped across the board and interest costs rose. Most projections suggest this trend will continue.
This could set up a climate for positive surprises. Results that beat expectations might be rewarded. More likely, however, the impact of a poor Budget will have a larger effect on expectations than any improvements in margins or bottomlines that show up in Q4.
Investors look to the future. Where past results can be extrapolated to suggest a trend of rising future profits, they get optimistic and drive prices up. However, the impact of the Budget is negative and most analysts expect margins to drop further, before there is a cyclical recovery.
There is a likelihood of about three sessions of volatility for every company declaring results. There will be volatility in the session before the results, volatility during the results session, and volatility in the next session following results. If the results are extraordinary, or the stock is a bellwether, this period of volatility may be extended in both directions and it can affect the prices of other corporates in the same business.
When results are expected, there are two ways to operate. The investor will wait for the results, digest these, and then take decisions about buying or selling. The trader will note that results are expected and try to make a quick profit during the volatility period. The investors’ decisions will be company-specific, while the traders’ decision will be more volatility-specific.
You can reasonably assume that volatility in terms of session high-low movements and also changes between closes will be considerably higher during that three-session period. It may affect other peer businesses. Hence, a trader needs to adjust stops and margins accordingly if he or she chooses to trade during that volatility period.
As a rule-of-thumb, one could assume that daily high-low ranges will double during those three sessions.
Given the overall mood of pessimism, it’s better to be braced for taking shorts. A majority of corporates will deliver results that are either in line with expectations, or worse and in both cases, shorts will work well.
One mechanical trading method worked well through the last Q3 results.
Traders who took short stock futures positions on the day of results and held the short through the next session made net gains. If you use a version of this method, it is necessary to keep disciplined stop-losses. There will be the occasional stock that delivers a big positive surprise.
The author is a technical and equity analyst
