Keeping an eye on the trading clock
09/13/18

●Adobe (ADBE) hit a new high yesterday, is up more than 50% year-to-date

●Earnings scheduled for release after today’s close

●Interesting potential short-term pattern emerged in long-term trend


 

It’s probably natural to think of trading in binary terms—when push comes to shove, something’s either a buy or a sell, right?—but such a mindset ignores a critical consideration: Time.

For example, publishing and design software powerhouse Adobe Systems (ADBE), which hit a new record high ($270.94) yesterday and is scheduled to release earnings after today’s close, is up more than 50% so far this year, gained 70% last year, more than 460% over the past five years, and...

You get the picture.

The stock has been a winner for long-term investors in recent years, outpacing its industry1 and leaving the broad market in the dust. The daily chart below shows the stock’s many pullbacks over the past year were good buying opportunities. So, from a binary, buy-or-sell perspective, you’d have to peg this one as a “buy,” right?

Adobe Systems (ADBE), 9/21/17–9/12/18. Adobe Systems (ADBE) price chart. All-time highs.

Source: OptionsHouse

Things are never that simple in the real world. Even an investor who expected to hold the stock for a decade or longer would rather buy on one of the pullbacks rather than on one of the swing highs preceding them. And short-term traders definitely would have wanted to get in on those swing lows—and also have the proverbial crystal ball to know when a swing high was forming so they could time exits and short trades. 

Which brings us back to today’s earnings. In the absence of a reliable crystal ball (if you have one, let us know), let’s look at some history. Over the past 31 quarterly earnings releases dating back to December 2010, Adobe has posted a negative earnings surprise just two times, and it hasn’t underperformed revenue estimates since 2014.2

The stock’s short-term price action around earnings releases, however, is a different story. Despite its history of beating its numbers, ADBE has also shown a tendency to trade higher before earnings and decline shortly after them:

●ADBE closed higher the day before earnings (yesterday, in this case) 61% of the time, with a median gain of 0.8%.

●ADBE closed higher on earnings day (today) 58% of the time, with a median gain of 0.4%.

●ADBE closed higher the day after earnings (tomorrow) 61% of the time, with a median gain of 2.4%.

After that, though, the bullishness seemed to wear off a bit. The second day after earnings, for example, ADBE closed lower 58% of the time, as it also did on the fourth day after the announcement. The following chart, which zooms in on the stock’s four most recent earnings releases (9/19/17, 12/14/17, 3/15/18, and 6/14/18), highlights the pattern of (mostly) rising prices before earnings and declining prices after them.

A difference in these examples, though, is that ADBE closed higher the day after earnings only once (after the March 15 example). In other words, in most cases the post-earnings selling started earlier.

Adobe Systems (ADBE), Earnings, 9/23/17 – 6/14/18. Adobe Systems (ADBE) price chart. Recent earnings releases

Source: OptionsHouse

As of yesterday, ADBE was following the pattern of pre-earnings gains. Will the rest of this apparent tendency repeat itself? There are never any guarantees. The point is that there are different types of traders, with different goals and different time horizons. Some swing traders who expected a repeat may attempt to capitalize on a potential down swing, while most long-term investors would likely sit tight, and new buyers may consider waiting for an anticipated pullback to get long.

Time horizon matters. That’s why the binary, it’s-either-a-buy-or-a-sell mindset probably isn’t the most useful way to look at the market.

Market Mover Update: After giving back a piece of Monday’s rally on Tuesday, Tesla (TSLA) turned bullish again yesterday, jumping more than 4% intraday.  

Hurricane worries pumped up crude oil prices for a second day, with the November WTI crude oil futures (CLX8) topping $70/barrel with a roughly 1.5% gain.

 

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1 Zacks.com. Adobe Systems (ADBE) to Report Q3 Earnings: What's in Store? 9/10/18.

2 StreetInsider.com. Adobe (ADBE) Earnings. 9/12/18.