No. 2 - Trading Earnings

How do you trade earnings announcements, from blowouts to big misses?

Unlike Christmas, earnings season comes four times a year. It’s the time when Corporate America gives investors a peak under the hood. The guys have some tips to follow ahead of earnings. And a note: since earnings are news events in themselves, everything the guys said about news applies to earnings as well. But there are also unique ways to tell how to trade around an earnings event.

In an earnings season, Tim Strazzini says you want to see who releases early in the season and how it impacts your stock. When a company reports late in the season, much of the expectations for a sector or a specific product are already factored into stock prices. Unless the company is an industry leader, it’s very tough for earnings to turn into big upside or downside surprises.

The companies that report early in the season will give context for later reports, Jeff Macke says, something that is especially true for specialty retailers.

But context isn’t everything. With drug companies, for example, what’s good for one company isn’t necessarily good for another, Guy says. The brokers, though, tend to swim in line. If one posts good numbers, chances are the others will follow suit, he says. However, Tim notes that after the first of the brokers reports, the others tend to be more muted because the market knows they are highly correlated.

When it comes to the energy market, earnings are almost irrelevant, Eric Bolling says. With refiners, investors tend to know how much money they’re making because they rely so heavily on commodity prices. If one company in the energy sector has great earnings, it’s a pretty good indication that the rest of the space will too, he says.

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Trader disclosure:
On APR 6, 2007, the day this show was recorded, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:Bolling Owns (DIS), Gold, Silver; Strazzini Owns (VZ), (YHOO)