This Earnings Season - Appeasements and Punishments

Since Aloca AA kicked off the current earnings season on Jan 10, there were two distinct reactions to the results - Appeasements and Punishments. The current market sentiment and the two different reactions are best captured by this little story: Everyone is appeased upon getting an Apple AAPL from Mr. Morgan JPM, and forgets all the punishment a CREE CREE received when he lost his Coinstar CSTR. Perhaps Mr. Goldman GS can tell us what this truly means. Earnings were generally positive in this earnings season. A lot of companies reported strong earnings, as in the cases of Alcoa AA, Intel INTC, J.P.Morgan JPM, etc. For them, they topped expectations, and experienced slight dips after the reports, but with the strength of the overall market, didn't experience any major selloff. IBM IBM reported earnings which topped expectations on Tuesday after market closed, and traded up >3% after market. Apple AAPL also reported earnings around the same time as well, and blew the expectations off. However, since this was after the news that Steve Jobs would be taking medical leave again, and that Apple initially fell 6% before recovering to falling only 3%, Apple's stock did not move much in after-hours trading. Nonetheless, these two stocks were likely the reason for the after-hours enthusiasm which at one point caused the Dow Jones Industrial Average surged >40 points from its closing price, after rising 50 points during the trading session already. So for this earnings season, it seems like as along as a company meets earnings expectations (and guidance, of course), there's good chance that the stock will pop a bit, or dip a bit, but not too far off from its closing price right before earnings reports even though the stock had been rising for a while. This, however, cannot be more wrong for stocks that disappointed the streets. Enter Coinstar CSTR and Cree CREE, two stocks which disappointed the street. For their defiant acts, they got severely punished. While Coinstar will report earnings on Feb 3, it lowered its guidance on Jan 14, causing an overnight reversal of expectation on its Redbox growth engine, and subsequently fell 25% on a single day, giving up all its run since Oct, 2010. For Cree, both earnings and revenue disappointed the street, and its stock price subsequently fell 15% on after-hours trading. For people who want to bet on earnings, and given how severely a stock gets punished after disappointment, it could make sense to use very short term put options or long straddles to bet on volatilities on a portfolio of stocks around their earnings dates. As long as some of those stocks experience their 'coinstar' or 'cree' moments, this strategy could reward investors handsomely. Daniel Ho is the founder of 10xreturn.com, a financial portal providing financial information and market statistics for investment professionals.