A Pioneering Approach To Earnings Season - Q4 2016

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Includes: CRF, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PPLC, PPSC, PSQ, QID-OLD, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU-OLD, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TALL, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USA, USSD, USWD, UWM, VFINX, VOO, VTWO, VV
by: Julien Messias

Summary

Lowest volatile earnings season since 18 months.

No information from the Capitalization factor, but a noticeable outperformance of Information Technology and Financials versus underperformance of Healthcare and Energy.

US markets are at their historical tops, many stocks as well: the performance is not only due to market leaders.

NDX stocks posted their best earnings season in last Q4, with many strong positive signals.

Summary

US Q4 2015 earnings season was one of the most volatile ever. Q1 2016 was one of the quietest. What about Q4 2016 (from Jan. 1st, 2017 to Feb. 28th, 2017)? Things tend to calm a bit. Let's have a more precise look:

We presented in the previous article our Pioneering Quantitative Approach focusing on prices and not on fundamental data:

Our analysis provides a guide per sector and per capitalization.

For more information, you can refer to the original paper by the author, Post Earnings Announcement Drift, a Price Signal? [1]

Important: In the following development, return always refers to relative return of the stock versus its index (total return).

NASDAQ COMPOSITE - CCMP: average capitalization (<$1B excluded): $13.7B

Our sample - before cleaning for the $1B capitalization - takes 1,055 earnings into account. After the filter, only 543 remain.

Raw statistics

On average, return is +0.00%, median is +0.21%, meaning that the distribution seems to be skewed on the negative side, with more important downside moves than upside moves. In absolute terms, the average move is 4.06% (vs. 4.77% for Q3 2016, 4.42% for Q2 2016, 4.16% for Q1 2016, 5.42% for Q4 2015, 4.86% for Q3 2015 and 4.52% for Q2 2015). This is the quietest earnings season since the beginning.

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Average volatility

4.52%

4.86%

5.42%

4.16%

4.42%

4.77%

4.06%

Source: Bloomberg, Uncia AM.

Source: Bloomberg, Uncia AM

By capitalization

Source: Bloomberg, Uncia AM. The bar chart lays between the 1st and 3rd quartile for each market capitalization percentile. The grey spot stands for the median.

Source: Bloomberg, Uncia AM. The bar chart lays between the 1st and 3rd quartile for each market capitalization percentile. The grey spot stands for the median.

By Bloomberg sectors

Source: Bloomberg, Uncia AM. We only keep sectors for which we have at least 30 earnings.

Source: Bloomberg, Uncia AM. We only keep sectors for which we have at least 30 earnings.

Earnings signals

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since Ytd (in red, LHS), since 2003, Jan 3rd (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since YTD (in red, LHS), and since Jan 3rd, 2003 (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of 2017, Mar 08th.

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of March 8th, 2017.

Neither market capitalization nor sector discrimination explain the earnings returns. Financials did pretty well, maybe helped by the Trump presidency's first measures, whereas Healthcare exhibited negative skewness. Regarding the relationship between earnings returns and 2-month drift returns, there is no strong evidence.

RUSSELL 2000 - RTY: average capitalization (<$1B excluded): $2.2B

Our sample - before cleaning for the $1B capitalization - takes 1,112 earnings into account. After the filter, only 614 remain.

Raw statistics

On average, return is -0.18%, median is +0.45%, meaning that the distribution for this small caps is, as for CCMP, highly skewed on the left-hand side: more negative large moves than positive. In absolute terms, the move is 4.19% (vs. 4.78% for Q3 2016, 4.51% for Q2 2016, 4.10% for Q1 2016, 5.44% for Q4 2015, 5.01% for Q3 2015 and 4.49% for Q2 2015).

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Average volatility

4.49%

5.01%

5.44%

4.10%

4.51%

4.78%

4.19%

Source: Bloomberg, Uncia AM.

Source: Bloomberg, Uncia AM.

By capitalization

Source: Bloomberg, Uncia AM. The highest capitalization exhibit the best return over the earnings. The bar chart lays between the 1st and 3rd quartile for each market capitalization percentile. The grey spot stands for the median.

Source: Bloomberg, Uncia AM. The highest capitalization exhibit the best return over the earnings. The bar chart lays between the 1st and 3rd quartile for each market capitalization percentile. The grey spot stands for the median.

By Bloomberg sectors

Source: Bloomberg, Uncia AM. We only keep sectors for which we have at least 30 earnings.

Source: Bloomberg, Uncia AM. We only keep sectors for which we have at least 30 earnings.

Earnings signals

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since Ytd (in red, LHS), since 2003, Jan 3rd (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since YTD (in red, LHS), and since Jan. 3rd, 2003 (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of 2017, Mar 08th.

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of March 8th, 2017.

As for CCMP, capitalization is not a significant factor of the performance of the stocks over earnings: the company may be small or large, it is not a key factor. Sectorwise, outperformers are Information Technology and Financials (as for CCMP). Regarding the "earnings signals", RTY exhibits the same pattern as CCMP with numerous negative earnings returns and positive 2-month drifts.

S&P 500 - SPX: average capitalization: $42.4B

Our sample is composed by 433 earnings releases.

Raw statistics

On average, return is -0.47%, median is -0.06%, meaning the distribution is left-skewed (as for CCMP and RTY). In absolute terms, the average move is 3.01% (vs. 3.51% for Q3 2016, 3.00% for Q2 2016, 3.17% for Q1 2016, 3.87% for Q4 2015, 3.47% for Q3 2015 and 3.20% for Q2 2015), and in absolute terms, blue chips from SPX tend to move less than other companies.

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Average volatility

3.20%

3.47%

3.87%

3.17%

3.00%

3.51%

3.01%

Source: Bloomberg, Uncia AM. By capitalization

Source: Bloomberg, Uncia AM

By capitalization

Source: Bloomberg, Uncia AM. The highest capitalization exhibit the best return over the earnings. The bar chart lays between the 1st and 3rd quartile for each market capitalization percentile. The grey spot stands for the median.

Source: Bloomberg, Uncia AM. The highest capitalization exhibit the best return over the earnings. The bar chart lays between the 1st and 3rd quartile for each market capitalization percentile. The grey spot stands for the median.

By Bloomberg sectors

Source: Bloomberg, Uncia AM. We only keep sectors for which we have at least 30 earnings.

Source: Bloomberg, Uncia AM. We only keep sectors for which we have at least 30 earnings.

Earnings signals

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since Ytd (in red, LHS), since 2003, Jan 3rd (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since YTD (in red, LHS), and since Jan 3rd, 2003 (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of 2017, Mar 08th.

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of March 8th, 2017.

Stocks from SPX are less volatile than those of CCMP, RTY or NDX, around 1pt on average. It may be explained by the average size of capitalization, but this is not a sufficient explanation as NDX average capitalization is higher (70.4 vs. 42.4) than SPX. As for CCMP and RTY, it is very difficult to exhibit a pattern with respect to capitalization or sector, except once again an sharp underperformance of Energy. We can exhibit as well underperformance of smallest capitalizations within the SPX universe.

NASDAQ 100 - NDX: average capitalization: $70.4B

Our sample is only composed by 91 earnings releases, making the analysis by far more difficult.

Raw statistics

On average, return is 1.08%, median is 0.21%, meaning that the distribution is dramatically positively skewed. In absolute terms, the average move is 3.54% (vs. 4.08% for Q3 2016, 3.97% for Q2 2016, 4.54% for Q1 2016, 4.95% for Q4 2015, 4.41% for Q3 2015 and 4.72% for Q2 2015).

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Average volatility

4.72%

4.41%

4.95%

4.54%

3.97%

4.08%

3.54%

Source: Bloomberg, Uncia AM.

Source: Bloomberg, Uncia AM

By capitalization

Not relevant as we have not enough data.

By Bloomberg sectors

Not relevant as we have not enough data.

Earnings signals

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since Ytd (in red, LHS), since 2003, Jan 3rd (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), on a weekly basis, as a weekly compilation of buy and sell signals since YTD (in red, LHS), and since Jan. 3rd, 2003 (in red, RHS).

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of 2017, Mar 08th.

Source: Bloomberg, Uncia AM. This chart shows the earnings signal (according to the methodology explained in the paper [1]), compared to the relative returns (absolute return of the stock minus the return of the total return index return) between the first price taking the full earnings information into account to the close price of March 8th, 2017.

In contrary with the former indices, the distribution is highly right-skewed, with many more big positive swings than negative. NDX posts very significative average and median returns over earnings (respectively +1.08% and +0.21%). Don't forget that NDX is big caps and "Tech" biased. "Tech" is the best performer over this earnings period - whatever be the index chosen - and momentum on these stocks is very positive. NDX is close to its highest levels ever.

As for all the indices, it posts its lowest volatile period for Q4 2016.

CONCLUSION

This empirical study emphasizes many things:

  1. Lowest volatile earnings season since 18 months
  2. No information from the Capitalization factor, but a noticeable outperformance of Information Technology and Financials versus underperformance of Healthcare and Energy.
  3. US markets are at their historical tops, many stocks as well: The performance is not only due to market leaders.
  4. NDX stocks posted their best earnings season in last Q4, with many strong positive signals.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.