Trading earnings volatility

07/13/22
  • Earnings season has started
  • PSMT fell nearly 13% Tuesday after releasing its numbers
  • Contrarians beware? Similar moves often followed by more volatility

Get ready for the numbers.

None of the big banks have checked in yet, but earnings season is underway, and one of the early reporters is a helpful reminder of why it’s a good idea to avoid snap judgments—and trades—when confronted by big earnings moves.

Discount shopping club PriceSmart (PSMT) released earnings after Monday’s close, topping revenue estimates but posting a surprise earnings miss.1 Yesterday, traders pushed down the stock as much as 13%:

Chart 1: PriceSmart (PSMT), 9/22/21–7/12/22. PriceSmart (PSMT) price chart. Post-earnings sell-off.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


One of only 22 intraday sell-offs of 12.5% or more in PSMT since 1997, the move dropped the stock to its lowest point ($63.15) since September 2020.

While “Price leading the news?” discussed one stock’s contrarian price swings after seemingly bullish and bearish events, scratching below the surface of yesterday’s move in PSMT highlights the importance of not over-generalizing about big down days.

Short-term counterreactions to volatile earnings moves are nothing out of the ordinary, so yesterday’s sell-off in PSMT certainly could have prompted some traders to consider buying the stock (or buying calls or selling puts) in anticipation of a short-term rebound. But those who analyzed PSMT’s price action after similar down days may have chosen to hold off before testing the waters.

PSMT’s median daily returns for each of the first five trading days after its other 12.5%-or-larger intraday sell-offs shows these big intraday declines were not necessarily optimal buying opportunities:

Chart 2: PriceSmart (PSMT) returns after -12.5%-or-larger intraday sell-offs, 1997–2021. Short-term volatility after big sell-off days.

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Day 3 was the only day with a positive median return—and, not surprisingly, the only one that closed up more often than down.

Also interesting was the fact that other models of Tuesday’s price action—for example, a 10%-or-larger intraday sell-off that also made a three-month (or longer) low—tended to be followed by similarly volatile price action over the next several days. Another fine point: It didn’t matter where the stock closed on the big down day—near the top of the range (see the October 2021 example in the first chart), near the bottom, or somewhere in the middle. The results were roughly comparable—the stock’s median returns were negative for at least three of the five days after the big sell-off day.2

Exactly one week after posting their second-biggest down day of the year, August WTI crude oil futures (CLQ2) fell more than 8% intraday on Tuesday, falling as low as $95.35/barrel and closing at their lowest level in three months. The market has retraced more than 40% of its December–June rally.

Market Mover Update: Casino and resort stocks bounced back yesterday after Monday’s sell-off, with WYNN Resorts (WYNN) rallying more than 4% intraday (see “Price leading the news?”).

Exactly one week after posting their second-biggest down day of the year, August WTI crude oil futures (CLQ2) fell more than 8% intraday on Tuesday, falling to their lowest level ($95.xx/barrel) in three months. The market has retraced more than 40% of its December–June rally.

Today’s numbers include (all times ET): Consumer Price Index, CPI (8:30 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Beige Book (2 p.m.).

Today’s earnings include: Fastenal (FAST), Delta Air Lines (DAL). Supporting document available upon request.

 

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1 StreetInsider. PriceSmart (PSMT) Misses Q3 EPS by 18c, Revenue Beat. 7/11/22.
2 All figures reflect PriceSmart (PSMT) daily price data, 9/2/97–7/12/22. Supporting document available upon request.

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