The analysis found Dow stocks tend to climb overnight after earnings are released (most public companies announce earnings when the stock market is closed). The study also showed Dow stocks tend to sink the next day before heading higher within a week or so.
But we largely ignored the question of how earnings measured up to analysts’ expectations. The following three figures show how Dow stocks behaved overnight, the next day, and the subsequent two weeks when their companies beat, matched, and missed analyst estimates of quarterly earnings per share (EPS) From October 2001 to September 2009.
Figure 1 shows that after positive earnings surprises, Dow stocks rose 0.77 percent overnight, fell 0.26 percent the following day, and gained 1.06 percent two weeks later. In other words, the market rewarded stronger-than-expected earnings, which isn’t a big surprise.
According to Figure 2, Dow stocks were less active after they merely matched expectations as they went nowhere overnight, dropped in-line the next day, and gained just 0.3 percent two weeks later
Finally, the market punished Dow stocks with earnings that disappointed the Street. They opened 2.06 percent lower, slid another 0.76 percent that day, and fell 0.6 percent further within two weeks.
by David Bukey, www.activetradermag.com
