Over the past decade, liquidity has risen before results, then dropped on the day itself as volatility increases and quants stay away, according to calculations from the U.S. bank. In other words, volumes were spurred by anticipation of corporate reports, and volatility fanned by reaction to them.
“The five days preceding the earnings day offer the most attractive days to access liquidity in a single stock,” Goldman strategists led by John Marshall wrote in a note. “Pre-position for earnings moves, but wait until four to six days after to exit.”
The study comes as Goldman has seen an improvement in broad liquidity metrics over the last three months after declines to multi-year lows at the end of 2018. In a research note in December, strategists led by Marshall and Rocky Fishman said the divergence between 2018’s heightened equity volatility and relative economic stability can be explained in large part by illiquidity.
It’s a fear often expressed by JPMorgan Chase & Co., which restated this month that liquidity and volatility can be connected in a feedback loop that exaggerates price moves.
Marshall’s April note also offered 25 “most differentiated” ideas for the next three months of earnings, where Goldman’s analysts are most out of consensus for the coming quarter and expect shares to move.
Firms such as Amazon.com Inc., Cisco Systems Inc., Amgen Inc. and Marriott International Inc. make the list of those with upside to estimates, while Gap Inc. and Intel Corp. are among those with the most downside.
Also, the consumer discretionary sector provides “unusually strong alpha opportunities,” or chances to beat the overall market, because its earnings-day moves have increased recently, the strategists said.
Another big opportunity may lie in the options market, especially given low volatility levels on broad cross-asset metrics. An index of currency volatility is at is lowest since 2014 and a gauge of Treasury price swings fell to a record low last month. The VIX closed Thursday at 12.09, near its lowest in six months.
“The average implied earnings day move ahead of this earnings season is +/-4.1 percent, its lowest level on record,” the strategists wrote. “We see options as unusually attractive given the recent rise in earnings-day volatility. We see low implied moves as evidence that there is limited fear priced into stocks.” - Bloomberg
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