The “Double-Signal EAR Strategy,” introduced on a Monex Securities program, was explained as an approach targeting stocks that simultaneously meet the conditions of an upward earnings revision and share-price momentum.
A Stock Voice program explained the objective of the Double-Signal EAR Strategy. The approach selects stocks that simultaneously meet the conditions of earnings indicators likely to be revised upward when results are announced and share-price momentum before and after the earnings announcement. The strategy is characterized by considering the price reaction as well, since following upward revisions alone can result in buying stocks whose prospects have already been priced in, leaving their share prices vulnerable to decline.
The stock-selection process begins by checking whether the full-year operating profit forecast was revised upward in the earnings release. Upward revisions are said to be particularly common in second-quarter results for fiscal years ending in March, which are announced mainly from mid-October to mid-November. Next, the strategy checks whether the return on each of the 3 trading days consisting of the day before, the day of and the day after the earnings announcement exceeded the TOPIX. Stocks are excluded if the combined return for the 3 days is positive but the return on even one of the days was below the TOPIX. The strategy emphasizes sustained strong momentum.
The program also explained the differences from the original EAR Strategy and the results of its testing. While the original strategy places greater emphasis on price reactions than on earnings, it can include periods of high uncertainty, such as rebounds after negative factors have been fully priced in. This approach therefore focuses on “upward revision × consecutive outperformance.” It also emphasized the importance of the next-day price reaction, since earnings announcements are often made after the market close. In testing over the past 6 years, stocks meeting these conditions were said to have shown a positive tendency through the following March in every case.