A Little Ditty About Stocks And Expectations

This post originally appeared on TraderPlanet.com.

“Get my stuff and get the car right now,” my wife yelled at me, “I’m going into labor.”

“Oh, come on now honey, are you sure?” I replied.

“What do you mean ‘am I sure?’ My water just broke.”

“But are you sure? Maybe you just spilled something on yourself?”

I actually said that. To my nine month pregnant, hormonally super-charged wife.

Technically I should not be alive. Fortunately I know how to duck and the can of hair spray she hucked at me missed by a mile.

My first child was within hours of arriving but I was not ready for it. I had no idea what to expect. And even if I thought I had an idea of what to expect, there was no way that I could really be sure how I would react when the reality of the situation hit.

Yesterday was a tale of two different stocks and two different expectations.

On one hand was $AAPL, which had an 18% increase in revenue to a record $54.5 billion. Profit also set an all-time high coming in at $13.08 billion.

On the other hand was $NFLX, which had $945 million in revenue with a profit of $8 million.

In after hours trading $AAPL dropped 10% loping off $50 billion in market value, while $NFLX stock surged 30% adding $1.6 billion in value.

And if you contrast the fact that $AAPL is a technological juggernaut, that not only owns, but created most of the high end gadget market, while $NFLX is transitioning out of a dying business model into an ultra-competitive one, it makes the price action in these stocks even more baffling.

But the key to unravel this mystery is expectations. It’s all about expectations and the reality of how earnings come in relative to those expectations. It’s why gaming earnings is one of the most subjective things you can do in the markets and one with almost unlimited risk.

As we proceed through this earnings season it’s good to remember the examples of $AAPL and $NFLX in order to decide if you really want to hold stocks going into their announcements on what is basically a coin flip.

And if you absolutely have to trade earnings, make sure you hedge your position risk with options, or better yet, use lower risk strategies like spreads as a proxy instead.

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