Hey trader,
Zscaler beat the estimate today, and the stock dropped 31%.
Modine beat by 21 cents and guided higher. The stock dropped 21 bucks.
Abercrombie reported a buck forty-seven and ripped straight to a Bierman breakout.
Same tape. Same day. Four consumer and tech names.
Four different outcomes that had almost nothing to do with the earnings number itself.
There’s one variable that drove every move.
Miss it, and you’ll get neutralized every quarter for the rest of your career.
Fortunately, I’m here to show you EXACTLY how it works.
The Number Is Not The Trade
Earnings are the ultimate neutralizer.
They humble you. They put you in your place. They make you realize you’re not nearly as smart as you thought you were on Sunday night.
Most traders treat the number as the trade. The number is not the trade.
The expectation going in IS the trade. The number is the trigger that releases what the expectation has already built.
I’ve watched this pattern repeat for 39 years, and I have never seen it fail.
Zscaler Overpromised And Under-Delivered
Zscaler beat the estimate this quarter.
The earnings were awesome on paper. The market did not care.
Guidance came in light on the revenue line. Wall Street voted with its feet inside an hour.
The stock dropped 31% in a single session. Two months of accumulation came out in less than 60 minutes.
That is not an earnings problem. That is an expectations problem.
The stock had run $60 going in. Every dollar of that run priced in a guide higher that never came.
Modine Beat And Guided Higher And Still Got Killed
Modine Manufacturing is the cleaner lesson.
They beat by 21 cents. They guided higher into a hot business with the exclusive contract to cool the Tesla battery.
The stock dropped 21 bucks.
A beat and a raise should be the cleanest setup in the book. It was not.
The expected move on Modine going in was 40 bucks. That tells you everything about what the options market priced before the print.
If you walked into my desk holding an unhedged Modine through that print, you would be fired. There is no defense for leaving a stock with a 40-dollar expected move open and uncovered.
Abercrombie Underpromised And Over-Delivered
Now flip the chart over and look at Abercrombie.
Earnings came in at a buck forty-seven. The stock ran straight into a textbook breakout.
Abercrombie trades at a P/E of around 15. The expectations going into the print were terrible.
Terrible expectations are the setup. The company underpromised and over-delivered and the market rewarded the surprise.
That is why I never short Abercrombie. The multiple is too cheap and the bar is set on the floor.
You short a P/E of five or six on a well-run retailer and the algos rope you in every time.
Dick’s Sporting Goods Already Ran The Trade
Dick’s Sporting Goods rallied from $185 to $237 going into the print.
The earnings beat was already priced. The market had no room left to reward the result.
The stock reported in line and dropped 11 bucks. A miss would have taken it down 22.
Buy a name that has already run 50 points into its own earnings and you have already lost. The trade was over before the press release went out.
The Pattern Underneath All Four
Strip the four prints down to one variable.
Expectations going in determine the move coming out. The beat or the miss is a side dish.
- Zscaler ran $60 into the print and got killed on a soft guide.
- Modine ran into the print and got killed despite a beat and a raise.
- Dick’s ran 50 points into the print and got killed on an in-line.
- Abercrombie sat at a 15 multiple with the bar on the floor and ripped on a clean beat.
Same pattern, four different ways. The market punishes priced-in optimism and rewards priced-in pessimism.
The Only Two Ways To Trade A Print
Nobody is smart around earnings. Not me. Not you. Not the desk at Goldman.
You have one of two options if you insist on engaging the print.
Run a Kaufman earnings flip. Buy the straddle.
Anything else is gambling. If you hold an unhedged position into a 40-dollar expected move, you are not trading. You are guessing.
I do not buy into earnings. It is not my style. I cannot read the expectations frenzy, and I will not pretend I can.
The two trades I run today are the ones the market sets up after the dust clears. Like Abercrombie pulling in five bucks from this breakout. That is when I load the boat.
The number is never the trade. The expectation is.
Read it that way, and your account stops getting neutralized every quarter.
Professor Jeffrey Bierman
Creator of the Genesis COG System
