IT'S EARNINGS THAT MATTER, OH REEAALLY?

Well I hate to pick on people because all of us traders have our moments where we just simply cannot get anything right. There is no sense kicking people when they are down. However, when I hear BS propogated I feel obligated to respond. Again going back to a radio show that airs out here in Southern California, the name will be left out to dodge legal actions. It was put forth the other day that it is earnings that matter and really all that matters with stocks.

Is this really true?

Above I have a chart of Fastenel which I just picked randomnly. It is a stock I watch because it swings alot and is a good momentum stock to trade. Below at the bottom I have their earnings. You can always pick an individual stock to make a point, but if you look through alot of them you will see this relationship or lack thereof is for the most part the same. Let's match up the price swings with earnings just to see how valid this claim really is.

First we begin with a move up that does have rising earnings alongside, so far so good. Now we roll into the next year and see a huge decline with earnings still rising. Hmm... I suppose we could say well it was an obvious buy because earnings were rising during the decline. I would actually agree with that. However, you would not wanted to have been buying when that decline started unless you have very deep pockets. There is a nice way to trade stocks with a few caveats added to this above situation which I will explain below. That decline leads to a great rally, again on rising earnings. OOPS a crash on rising earnings, how can that be? Keep in mind that earnings are reported after the fact so we did not know at the time of the crash earnings were going to decline because they were reported afterwards. Now we roll into a very nice rally on declining earnings.

What we have here is basically a somewhat random relationship. I think you might be suspecting what really rules the day here, but let's get to that in a minute. Now I have the same stock a little bit further back in time with estimated earnings added. After all haven't we learned that Wall Street can be implicity trusted? Any earnings estimates must be something we can trust our lives with? They would never manipulate numbers to get bonuses would they?

Here we now have a 60% rally on declining earnings, how could that be. We can see though that we have estimated earnings rising sharply so we should feel really good about things now. This stock should definitely keep going.... Huh!! Part of that decline is that the stock split, but even with that being considered there was a nasty decline that occurred here. I could go on and on with chart after chart and the same story emerges. This is another Urban Myth, but it is designed to keep your money invested "for the long term." As I hope most people have finally learned, all that does is give nice management fees to fund managers, it does not enhance your investment accounts.

You should always trust but verify anything you read including what you read here. The real problem that exists today with earnings, is the manipulation that goes on. There is so much pressure to meet the numbers, that jobs depend on it. Isn't it funny how they always magically beat them by a penny per share or something along those lines? Oh it is just the analysts really did great work and had the company's pegged.

PLEASE

I know alot of people are busy working their regular jobs and want to be able to leave this up to the professionals. There are good ones out there so you cannot throw the baby out with the bath water. However, please take it upon yourself to at least get a little educated. Do not blindly buy into the Wall Street BS. There are good ways to trade off earnings and I alluded to one of them earlier. Run a moving average of them for several months. When you have a rising line and a decline in price down to at least a 20 day moving average or less ( preferably a greater deline than that ) on a weekly chart, you can buy into those dips assuming the valuation is reasonable which it should be in that situation. However, do not blindly buy stocks on declines because earnings are rising, or short based on them declining. Earnings do not drive short to medium term stock movement. I would suggest not using a money manager who invests based on that premise.