Contents
Uncertain events are events with unknown outcomes.
There are certain types of “uncertain events” that have “double uncertainty” associated with them.
As I am writing this just prior to the United States 60th presidential election of 2024 between Donald Trump and Kamala Harris, let’s use the election as an example.
Elections
While we know that it will happen on November 5th of 2024, we do not know the outcome as to who would win.
This is the first uncertainty.
Even if you believe you will know who will win, you will not know how the market will react to that person’s win.
Will the market go up? Or will the market go down?
This is the second uncertainty.
And this is what I meant by “double uncertainty”, for a lack of a better word.
Furthermore, you also don’t know what would be the potential aftermath of the election. Will it be a contested election? And how would the market respond?
FOMC Meetings
Coincidentally, there is an FOMC meeting later that week of the election.
This is when the Federal Open Market Committee (FOMC) will announce its decision on monetary policy and interest rates, such as whether to maintain, raise, or lower the federal funds rate.
This is the first uncertainty.
Okay, maybe many people will have a good idea prior to the announcement as to what they will most likely announce.
Nevertheless, there is the second uncertainty as to how it would move the stock market prices the day of or the next day.
While one might logically reason that if the rates go up or down, then based on macro-economic principles that should be good or bad for the stock market, etc.
But does the market always behave based on logic?
I would submit that it does not.
You may say that it is only common sense that the market would do this.
But does the market move based on common sense?
It does not, at least not in the short term.
By definition, common sense is what most common people would believe would happen. If the market moved as what most people believe it would move.
Then most people should be able to predict the market. But the statistics do not bear this out, at least in short term trading.
Perhaps in longer term investing, it may be true that the market tends to go up in the long run.
I once heard, or read, that the market is designed to fool most of the people most of the time. Whether this is true or not, I don’t know.
But the short-term movements of the market are far from certain.
Earnings
One may argue that if the stock earnings announcement beats analysts estimates, the stock price should go up.
And that if earnings missed expectations, the stock should drop.
This is common sense, but I can find many examples to the contrary.
The latest 2nd quarter NVidia (NVDA) earnings beat estimate.
It reported 0.68, which is over the estimate of 0.65.
Source: tradingview.com
Yet the stock price dropped the following day (August 29, 2024) after the earnings announcement the evening of…
An investor may have predicted correctly the first uncertainty and would have guessed that NVDA would beat expectations.
But then the investor may not have guessed correctly on the second uncertainty as to whether NVDA would move up or down on the report.
That is not an isolated one-off example.
It is easy to find other examples.
Look at the drop that happened to Merck (MRK) right after the morning earnings report on July 30, 2024…
Was that due to a bad earnings report?
No, the earnings reported better than estimated…
Here is an opposite example.
The company Dow Inc reports earning the morning of July 25th, 2024.
It reported 0.68 which is lower than the estimate of 0.71.
So one might assume that the stock would drop.
Yet, the stock rallied that day of the announcement.
Look at that big green candle on the chart.
Conclusion
In order to get the direction of an earnings move correct, one needs to be able to predict both the earnings report and the market’s reaction to that report.
It doesn’t matter whether there are two uncertainties to predict or multiple ten uncertainties to predict.
Since there are only two outcomes, you have a 50-50 chance of getting it correct.
Just flip a coin and don’t think about it.
The short term movement of the market is difficult to predict due to the multiple factors of uncertainty involved.
We all would like for the markets to be logical and predictable.
But it is not.
As economist John Maynard Keynes once said, “The market can remain irrational longer than you can remain solvent.”
We hope you enjoyed this article on uncertain events.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
Hi Gavin, have you ever heard the https://www.earningswhispers.com which some people may use for the earnings prediction? I just heard about it and haven’t decided to pay for its subcription.
I’ve been on their site a few times, but never used the paid version.
so do you think their earnings prediction useful and correct?