Your typical image of an intraday trader would be a trader poring over mountains of charts and trying to make some sense out of the variety of supports, resistances and breakouts. Ironically, an intraday trader has to be a good analyst of fundamental trends too. That is where quarterly results announced by Indian companies each quarter become relevant. The quarterly results are not only a signal of performance in the previous quarter but also guidance to how the company could perform in the coming quarters. For an intraday trader, it is these quarterly numbers and the guidance that provides bouts of volatility to the stock and makes them interesting for day traders. Let us look at how quarterly results can provide meaningful cues to the intraday trader.
Gauging sectoral trends
One of the important cues that you get from quarterly results is the industry wide trend. Look at any sector like steel, cement or IT and you find broad industry trends visible in the quarter results. It could be expansion of margins, compression of growth or just the disruptive impact of new products introduced. These sectoral trends enable an intraday trader to decide whether to buy a stock on dips or to sell on rises. It also permits the intraday trader to do an intra-sector long/short where there are clear outperformers and underperformers.
Gauging company trends
For an intraday trader, it is the company trends that matter a lot more than the industry trends. The intraday trader gets a picture of what the company is doing right and what it is doing wrong. The trader is able to decide whether to pursue the stock on the long side or the short side. Quarterly results also provide a detailed breakup of performance on growth, margins, efficiency etc with respect to previous comparable data. This is an important trigger for a trade.
Is there hype building around the stock
Quite often the intraday trader follows the policy of buying on hope and selling on hype. Hype is when the stock tends to get overpriced and quotes at rich valuations. The quarterly results and the stock price performance around the results period is the right time for the intraday trader to classify the action on the stock as hope or hype and craft trading positions accordingly.
It is rumours versus announcements
Quarterly results also act as a reality check. Normally, it is said that in the markets there is no smoke without fire. Take the case of DHFL where the quarterly results came in as a reality. Same is the case with Yes Bank and IndusInd Bank. Traders always knew that there were asset quality problems in these companies and it was also discussed only in hushed tones. The last quarter saw both Yes Bank and IndusInd Bank showing asset quality in their books and taking write offs in the quarterly results. The quarterly results are very useful to ratify the news you have picking up in the grapevine. Normally, a smart trader takes bigger positions only when the rumours are ratified by the actual quarterly data. That is why it is useful to the intraday trader.
Gap between expectations and reality
You quite often get to see instances of stocks where profits have grown by 10% but the stock has fallen 15% in the market. If it is hard to fathom, it is all about the gap between expectations and reality. What drives the stock prices is not the actual news announcement but how the announcement was with respect to expectations. For example, if market has built expectations that the profits will fall by 15% and the actual fall is only 5% then it is seen as a positive for the stock and the stock price often goes up. It is all about the gap between expectations and reality. Whether the gap is favourable or unfavourable impacts the stock price. For an intraday trader, this is one of the most important cues.
Having understood that the gap between the expectation and reality means a lot to intraday traders, lets gear up to exploit the opportunity that arises in coming results season.