+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

SocGen: Don't be caught shorting stocks during 'cheating season'

Nov 3, 2015, 00:10 IST

The Cheat with the Ace of Clubs by Georges de La TourWikimedia Commons

Stocks had a great October. The market posted the best one-month gain in 4 years, and once again got into positive territory for the year after August's sharp selloff.

Advertisement

According to one analyst, however, this rally is based on a sham.

"The resurgence in risk appetite can be put down to central bank support, with the ECB and China either cutting rates or intimating that they are prepared to do more, and of course the charade that is quarterly company reporting," wrote Societe Generale's Andrew Lapthrone in a note to clients Monday.

His main concern is earnings season, which he christened "cheating season", the approximately three week period where a bulk of the companies in the S&P 500 and beyond report quarterly results. According to Lapthorne, the companies rig expectations, making everything look better than it really is.

"As our readers will be well aware, we have long highlighted the game corporate investor relationship departments play with analysts," said Lapthorne. "To the extent that many companies apparently now simply tell analysts what numbers they should submit to the consensus, numbers which inevitably they then beat a couple of weeks later."

Advertisement

To Lapthorne, companies lower the bar to the point that overachieving is easy, and in turn analysts and investors get excited over nothing.

In the note, Lapthrone also pointed out just how much the noise of earnings influences analysts upgrades and downgrades on certain stocks.

"This relationship is, in our view, clearly seen below; during the busy reporting weeks, upgrades rise relative to downgrades only for this to reverse during 'quiet' periods when companies revert to guiding numbers back down again," wrote Lapthorne.

Societe Generale

These upgrades also come with a pop in the stock market, said the note. The S&P 500 goes up about 60% of the time during weeks with a large number of earnings reports, said Lapthorne, as opposed to less than 50% during non-earnings heavy weeks.

Advertisement

This could also help to explain why the stock market is historically the most volatile during the month of October.

In the end, Lapthrone draws one lesson from 'cheating season' and one potential trade for when it is over.

"The simple message is this: don't be short during US reporting seasons," he said. "However given weak trend earnings momentum shorting the market thereafter could be worth considering."

NOW WATCH: Russia's military is more advanced than people thought

Please enable Javascript to watch this video
You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article