Nvidia is the hottest stock right now, largely due to the ongoing strength of the AI story. Personally, I’m not a big fan of simply buying the hottest stocks, as they can crash badly if you enter late and the tide turns. However, hot stocks can continue climbing longer than we expect. To capitalize on opportunities, I always prefer sticking to well-grounded strategies based on reliable research, even for trading hot stocks like Nvidia.
Most traders know that earnings days can be volatile for U.S. stocks, and some strategies involve buying or shorting stocks before earnings or using strangle option strategies. However, I believe guessing whether a company will beat earnings isn’t a reliable approach.
A more solid strategy involves applying principles like earnings momentum, which suggests buying stocks with earnings surprises. However, my observation is that overall market conditions matter, too—if the market is bullish, stocks tend to jump more during earnings season, and the opposite happens in a bearish market. There is, however, a better way to trade earnings days.
Introducing Post-Earnings Announcement Drift (PEAD)
Recently, I came across an anomaly in the stock market documented in several academic studies (papers listed at the end of this article). When there is an earnings surprise, stocks tend to move higher over the following weeks, or even months. This shouldn’t happen in an efficient market where all information is immediately priced in. However, the market often takes time to fully incorporate the earnings news, allowing the stock price to gradually rise over time. No one knows the exact reason for this anomaly, but traders can exploit it—this is called the Post-Earnings Announcement Drift (PEAD).
PEAD Trading Strategy
Here’s how the strategy works: choose a stock with several quarters of earnings surprises—Nvidia fits this well. Instead of buying before the earnings release, wait until after the results are published. This removes the guesswork about whether there will be a positive surprise. If there is, look for confirmation from the price movement (the stock price should move up, not down). If everything aligns, buy with a stop-loss set just below the lowest point prior to the earnings day. Hold the position for about two weeks, as this is typically when most gains from the drift occur, and then sell. You can also take profits earlier if you’re satisfied with the return.
Let’s apply this strategy to Nvidia’s last five earnings periods to see how it works.
Nvidia’s earnings on 28 Aug 2024
Nvidia delivered higher-than-expected revenue and earnings, which was positive. However, the share price declined afterward. Since there wasn’t alignment between fundamentals and technicals, there was no trade to be made.
Nvidia’s earnings on 22 May 2024
In May, Nvidia beat earnings estimates, and the share price jumped. Both the fundamental and technical conditions were aligned, making this a valid buy signal. If held for 10 days, the gains would have amounted to about 18%.
Nvidia’s earnings on 21 Feb 2024
Nvidia also beat estimates in February, and the stock gapped up after the earnings day. This was another valid buy signal, which similarly delivered 18% over the next 10 days.
Nvidia’s earnings on 21 Nov 2023
Although Nvidia had an earnings surprise in November, the stock price fell the next day. Since the price action didn’t align with the earnings beat, there was no buy signal here.
Nvidia’s earnings on 23 Aug 2023
This example demonstrates a loss. Nvidia’s earnings beat expectations, and the stock opened higher the next day, triggering a buy signal. However, the stock then dropped, hitting the stop-loss and realizing an 11% loss. As with all strategies, there’s no 100% accuracy, so respecting stop-losses is crucial to protect capital.
Trade the Magnificent 7 Stocks Before the U.S. Market Opens
What if you could trade the Magnificent 7 stocks before the U.S. market opens after earnings? With newly launched Daily Leverage Certificates (DLCs) tracking the Magnificent 7, this is now possible. These DLCs are traded on the Singapore Exchange (SGX), allowing you to buy and sell them during Asian trading hours while the U.S. market is closed.
Earnings are typically announced after U.S. market hours, so you can observe the stock’s post-market reaction. If there’s a positive earnings surprise and the stock jumps, you can take a long DLC position when Asian trading begins, even before the U.S. market opens. While some post-market gains will already be priced in, the stock might have more room to rise, given the post-earnings drift principle.
Long and Short Magnificent 7 in SGD
These DLCs cover all Magnificent 7 stocks, with both long and short options available (see table below). You can check out more details on the SocGen website.
Since DLCs are traded on SGX, you can conveniently buy and sell them like any listed security through your regular brokerage and in SGD currency. However, as DLCs are leveraged derivative products, they’re classified as Specified Investment Products (SIP), which means traders must have the relevant academic background or experience. Otherwise, passing a module and quiz is required to qualify for trading them.
DLCs are designed for short-term trades and can amplify both returns and losses by 3 times in this case. For example, using a 3x Long on Nvidia could significantly increase returns—while the standard return could be 18%, a leveraged position could theoretically result in much higher returns. However, it’s important to recognize the compounding effect that occurs when holding DLCs over multiple days. The return is not as straightforward as multiplying by 3 times; if the stock moves up consistently, the return could exceed 54%, but if there are fluctuations, the return might be lower. While leveraging can enhance potential returns, helping traders boost their ROI in a shorter period, it is also important to watch your downside risk as losses can also be magnified.
The PEAD strategy applies not just to Nvidia but also to other Magnificent 7 stocks. It works similarly on the short side—if earnings fall below estimates and the stock price drops, it can signal a short opportunity. For example, Tesla’s stock behavior can illustrate this well. Overall, past earnings trends are crucial—multiple positive surprises suggest a long position, while frequent misses suggest a short position. But remember, price movement must confirm the earnings result before entering any trade!
This article is sponsored by Société Générale, Singapore Branch, but all views are my own.
Disclaimer
This advertisement has not been reviewed by the Monetary Authority of Singapore. The views expressed under this article represent the personal and independent views of the author and do not constitute investment advice. The content of this article does not form part of any offer or invitation to buy or sell any daily leverage certificates (the “DLCs”), and nothing herein should be considered as financial advice or recommendation. The price may rise and fall in value rapidly and holders may lose all of their investment. Any past performance is not indicative of future performance. Investments in DLCs carry significant risks, please see dlc.socgen.com for further information and relevant risks. The DLCs are for specified investment products (SIP) qualified investors only.
- Ball and Brown (1968) – “An Empirical Evaluation of Accounting Income Numbers”
- Foster, Olsen, and Shevlin (1984) – “Earnings Releases, Anomalies, and the Behavior of Security Returns”
- Livnat and Mendenhall (2006) – “Comparing the Post–Earnings Announcement Drift for Surprises Calculated from Analyst and Time Series Forecasts
