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Institution Trading on Earnings Day

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Institutions managing large sums of money are generally long term investors with infinite time horizons. When an institution decides to add or decrease their holdings in a particular company it is not as easy as clicking a button on their computer screen. This is an overview of what might take place at your mutual fund or pension fund office on trading day.

Let's say the Fund of Thrift has a vested interest in company XYZ since they own .5% of all outstanding shares. The fund has a dedicated analyst who follows XYZ by analyzing earnings reports, growth forecasts, and conference calls from leadership. The stock currently trades at $50 and all analytical reports point to a fair value of around $58. The fund board believes that XYZ is the leader in the sector and ultimately would like to add to its holdings. Since the fund generally likes to own undervalued stocks and sell them when they reach a point above their fair value, they are waiting on the newt earnings call for some clues indicating future growth and an increased FV.

On earnings day when XYZ announces, the analyst takes a look at the numbers and compares them to his projections. He might think the company has increased its FV to around $62 based on the numbers and passes this information to his trader. The trader, who is most likely a just a person who inputs data into an algo trading computer, will try to get the best price. When trading $1 million, pennies matter so he may try for a better than volume weighted average price (VWAP). VWAP is the dollars traded divided by total shares and represents a pension buy/sell benchmark.

Other funds are doing the same thing as Thrift, but every analyst interprets the numbers differently. This is partially what causes huge volatility on a stock’s earnings day. As the day goes on and the analysts have time to look a bit deeper at the figures, a general consensus generally sets in and the market dictates a price.

Where are the charts in all of this? There might be a technical guy on the team but when it comes to buying/selling stocks, you have to have concrete reasons for owning or selling a stock. Earnings give a real estimate of a company's worth whereas a chart only indicates upcoming psychological inflection points such as support or resistance. Both have their place, but for the purpose of this scenario, charts are most likely not even an afterthought.

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