Twitter Attempting Another Pre-Earnings Rally

Twitter Inc TWTR shares are up 2.1 percent in the past five trading days in what has become a familiar pattern for traders ahead of the company’s quarterly earnings reports. Twitter is expected to release Q1 earnings before the market open Wednesday, and the market is once again taking a bullish stance on Twitter ahead of the release.

Historical Performances

In three of the last four quarters, Twitter shares have rallied in the final days before earnings are released. This week’s 2.1 percent gain is in line with the average return for the stock in the week headed into its past four earnings reports. Unfortunately, that positive momentum headed into earnings hasn’t carried over.

Twitter shares have tanked following three of its last four earnings reports, averaging a 10.6 percent one-day decline in that time.

Ironically, Twitter has actually met or beat earnings expectations in each of the past 13 quarters. However, traders are much more concerned with growth numbers such as revenue and monthly active users (MAUs).

In The Now

Twitter’s pre-earnings rally and subsequent sell-off is likely due to two prominent market dynamics. First, Twitter is a popular stock among short sellers. According to shortsqueeze.com, Twitter currently has a short percent of float of 11.3 percent with 5.4 days to cover. Short sellers likely cover some or all of their positions ahead of earnings to limit risk from a strong quarter.

In addition, Twitter bulls see that the stock is down 67.1 percent in the past three years and may take a stab at timing the company’s inflection point by buying ahead of earnings.

If Twitter delivers another quarter of lackluster earnings growth in Q1, look for the pattern of post-earnings selloffs to continue this week as shorts re-enter their positions and bulls cut losses and live to fight another day.

Joel Elconin contributed to this article.

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