There’s a big difference between trading and investing.
When you invest in a stock, you should be going in with a long-term view. You can certainly change your opinion as time goes on and events warrant it. But you shouldn’t plan to hold a stock for years and then get spooked by one bad earnings report (unless something extraordinary happens, like fraud).
Trading is different. A trader is often looking for a specific catalyst.
Many traders view earnings reports as important catalysts. It’s not uncommon to see a stock surge after the company reports a beat on quarterly earnings.
For example, Powell Industries (Nasdaq: POWL) just announced a big earnings beat last month. It crushed earnings by an astonishing 160%, and shares jumped 20% the day the report was released.
A few days later, Hello Group (Nasdaq: MOMO), an entertainment tech company, beat earnings by more than 20%. The stock price jumped 36% on the news.
So it’s important to have near-term catalysts for your stock. Otherwise, you have no reason to believe the price will quickly move higher – other than that “it’s a good stock,” which isn’t a valid rationale at all.
If there’s no reason to expect a stock to jump in the near term, your investment could be dead money. It could just sit there, doing nothing. If you’re putting your money to work in the market in the short term, you want the trade to be completed fairly and quickly.
Make your money, get out and move on to the next trade.
Below are a few potential catalysts that you can look for to get your stock moving quickly.
- Earnings. Most companies announce their earnings report dates in press releases a few weeks before the reports come out.
If the company you’re interested in has not yet announced its earnings report date, simply add three months to the last quarter’s report date and you’ll likely be pretty close.
Companies will begin to report Q1 earnings in the next couple of weeks. So now is the perfect time to stock up on companies that have a track record of beating expectations.
- Analyst upgrades. When a new “Buy” or “Sell” recommendation is issued, stocks can move significantly. So I want to give my trades the best opportunity to be upgraded. To do that, I find stocks that analysts hate.
If most analysts already have “Buy” ratings on a stock, the chances of an upgrade are slim. The bandwagon is full.
But if most analysts rate the stock a “Hold” or “Sell,” you can sometimes get a nice move higher when they upgrade it. Look for stocks that don’t have many existing “Buy” recommendations.
- Short squeeze. If a stock is heavily shorted (traders bet the stock will fall, so they sell it first and buy back later), every tick higher in the price of the shares is causing pain for the shorts.
Eventually, when the losses get to be too much, the shorts exit their positions by purchasing the stock.
That creates more demand and pushes the price even higher. As the price climbs, more shorts buy the stock, and you can get a powerful move from all the extra demand for the shares.
Look for stocks with more than 10% of the float (the number of shares available for trading) sold short.
Stocks typically don’t make big moves for no reason. You need a catalyst that will push your stock higher in the near term.
If you can’t find one, you may want to find a different stock.