Monday, June 21, 2010

Next month July, will be Q1 earnings season. Have you ever analysed or observed the trend where Markets rally a few weeks before an earnings season? This of-course does not happen on really bearish times (Like in 2008-09 recession) where markets plummet and don't follow the trend.
Well, it happened a few weeks before last earnings season. And, its happening now (Markets rallying from 4900 to 5350). Now, why is this happening ? Big shots like Mutual funds and FII's will have their own estimates of earnings that are to come in July. Their estimates are based on corporate advance tax payments, insights on order book, project schedule and so on. Now, based on their estimates, they will buy ahead of time which justifies the rally few weeks before earnings season. Now, their estimates are more often than not, pretty accurate and the rally before earnings season will put markets ahead of time by a month.
As the results or earnings season unwind, unless it beats their expectations by more than 10%, Markets wont rally further. In fact, If the earnings are in line or below their expectations, Markets are going to correct due to profit booking.
Okay. So what can we do as a Retail investor. Do not buy after a pre earnings season rally. Do not buy now. Its always a good idea to buy 30 days before earnings season when markets are at good support levels. To be more specific, buying good stocks in the 1st week of December, March, June and September is a good idea. Its always a bad idea to be buying during the 45 days of earnings season. Thats when the big shots book their profits.