Friday, October 21, 2016

"Earnings Jolt Stocks Like Never Before as ETFs, Algos Get Blame" (NVDA; FSLR)

Yes, I am thinking about NVIDIA'a upcoming numbers* and I still get butterflies riding an extended stock that is priced with zero-tolerance for disappointment.

We went through the same thing with First Solar, out in public here on the blog, every three months, pretty much from the $20 IPO in November 2006 to the $317 top-tick in less than 18 months and then down to $11.43 over the next four years.
On some report days the options would move through five or six strike prices.

It got so rollery-coastery we'd do stroke symptom identification drills using the American Stroke Association's F.A.S.T. protocol:
Face drooping:  -no, that's just a hang-dog expression
Arm weakness:  -no, she just through a monitor across the room
Slurred speech: -no, that's the director of customer relations/client retention just returned  from a three grand lunch.
Time to call an ambulance: no, time for some rapid-pulse chair aerobics as the algos move faster than even seems possible.
Hmmm....this intro seems to be going to a dark place.
On a lighter note, here's the headline story from Bloomberg:
  • Instances rise of big price swings after results are announced
  • Researchers see link to ascent of ETFs and passive investing
Just because U.S. corporate profit growth has ground to a halt doesn’t mean the impact of earnings announcements in the stock market has diminished. In fact, it’s never been bigger.

Swings such as Alcoa Inc.’s 11 percent plunge last week have become increasingly common since the financial crisis, according to a study by Leuthold Group that looked at how shares reacted in 193,000 instances going back to 1996. The Minneapolis-based fund manager found that earnings-day stock moves exceeding 5 percent doubled in seven years, even as the accuracy of analyst forecasts deteriorated only slightly and market volatility stayed the same.

Some investors pin the trend on the rise of computerized market makers whose hair-trigger algorithms have supplanted the deliberation of their human predecessors. To others, the swings are evidence not of a faster market, but a slower one. They say the likely culprit is the meteoric rise of passive index funds, which fail to appreciate differences among companies and their shares, throwing the process of price discovery out of whack.

“When earnings come out, it’s becoming a rockier road,” said Bill Schultz, who oversees $1.2 billion as chief investment officer of McQueen, Ball & Associates Inc. in Bethlehem, Pennsylvania. “You’re seeing more index-dominated movement and less retail participation in stocks than you have in the past.”
In an earnings season less than a week old, a handful of U.S. companies beyond Alcoa have already seen outsized price swings relative to recent history. On Oct. 13, First Republic Bank slipped 4.1 percent, the biggest post-earnings move since 2014 and almost double the historical average. Hasbro Inc. climbed 8.1 percent on Monday following its report, three percentage points more than the average throughout the bull market.

Index investments like exchange-traded funds have become an easy target for anyone trying to diagnose market anomalies if for no other reason than their rapid growth. More than $5 trillion is invested in passive strategies tracking stocks today, more than double the $2 trillion of five years ago, data from Morningstar Inc. show.

“With all the money flowing in, people are quick to point the finger at ETFs,” said Eric Balchunas, an ETF analyst with Bloomberg Intelligence. “It’s a relatively new variable on the scene and it gets tagged with a lot of problems. There are a couple of suspects, and maybe ETFs are one of them, but they’re not the only issue.”

While lots of things could contribute to bigger share reactions in the hours after a company discloses results, Leuthold found incomplete evidence in the accuracy of analyst forecasts or overall market volatility. Reported earnings differed from the consensus estimate by 11.3 percent between 2010 and 2016 compared with 9.7 percent from 2004 to 2007, it found, while instances of big moves on non-earnings days were the same....MORE
*November 3rd.

Before we go any further, our NVIDIA boilerplate: 
We make very few calls on individual names on the blog but this one is special. 

They are positioned to be the brains in autonomous vehicles, they will drive virtual reality should it ever catch on, the current businesses include gaming graphics, deep learning/artificial intelligence, and supercharging the world's fastest supercomputers including what will be the world's fastest at Oak Ridge next year.
Not just another pretty face.
Or food delivery app.
That's me, quoting myself (NVIDIA Sets New All Time High On Pretty Good Numbers, "Sweeping Artificial Intelligence Adoption" (NVDA))

As noted prior to last quarter's release, Aug. 11
NVIDIA: Ahead Of Today's Earnings Report (NVDA)
We don't do public estimates of sales, earnings and guidance, or guesses at market reaction to same, much less on the day of the report.  
I'll say this though, even after going through this routine for a lot of years on a lot of names it's still a bit nerve wracking. 
The stock is priced for perfection, and has delivered the last three quarters, but personally I'd actually like to see a 20% after-hours whack.
We'll be back after the release. $59.70 up $1.19...
Here's how that worked out: 

NVDA NVIDIA Corporation daily Stock Chart

And the quarter before that:

May 12 close  $35.57 Thu
May 13 close  $40.98 Fri
May 16 close  $42.19 Mon

Sunday, May 15, 2016
NVIDIA: A $2 Billion Chip to Accelerate Artificial Intelligence (NVDA)
First a heads-up. The technical trading gurus at Investor's Business Daily are saying take profits after Friday's big move, now 20% above their buy point. I don't think so but it all depends on your time frame.

And whether you have the discipline to buy back in should the stock not pull back.
(see links below for some of the things driving the stock)

On the other hand it's not like the stock is unknown and there are hordes of naïfs who have yet to discover it. NVDA was the fourth-best performer on NASDAQ in 2015 and through Friday is up 95% in 52 weeks and 60% since the overall market bottomed on Feb. 11....
Monday, May 16, 2016
Analysts React To NVIDIA's First Quarter Report (NVDA)
Nvidia Surges 14% to All-Time High: Street Dazzled by ‘Secular’ Opportunities
I'll leave it to the reader to identify the gaps in the chart.
In the words of coffee analyst Rachel Green:
"That's a risky little game".

-Friends, Season 8 episode 3
airdate 27 September 2001, 

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