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Using Whisper Numbers In Combination With Price And Volume Patterns

By Daniel Beighley

Once considered as sensitive information only
certain Wall Street analysts were privileged to, whisper numbers have now taken
the form of the Internet and can be an effective way to measure the sentiment of
a stock.

To begin with,
whisper numbers are the unofficial consensus of what a company’s earnings per
share will be before the actual numbers are announced. Much like the official
analysts’ consensus, whisper numbers serve to be as accurate as possible. Unlike
the analysts’ consensus, whisper numbers vary and are derived without standard
guidelines.

Essentially, whisper
numbers represent a compilation of information screened and processed by the web
sites who post them. This process involves proprietary software that supposedly
scours Web sites, message boards, financial articles, and submitted tips that
could originate from anyone, including the Easter Bunny.

So how accurate are whisper numbers?

A study done by Bloomberg showed that
44% of analysts missed the actual earnings of a stock, while only 21% of the
whisper numbers were off. Another study by GetWhispers.com concluded that their
whisper numbers were able to predict actual earnings 3.4 times better than
analysts. Below are some recent examples of whisper number reporting.

All that’s great but how can I make money from whisper numbers?

Whisper numbers
should not be relied upon any more than the official analysts’ consensus.
Analysts’ reports are often conservative because they cater to investors with
buy-and-hold strategies. Whisper numbers are designed to denote a more accurate
prediction and can be used to act as a barometer for the sentiment of a stock. I
refer to the data like any other indicator, chart pattern or news that might
affect my trade.

Due to their
increase in popularity, whisper numbers don’t have the edge on a stock that they
used to. In the heyday of the technology boom, a stock that exceeded its
analyst’ consensus, yet fell short of its whisper number, was said to have
disappointed, thus punishing the share price. Now that agencies such as
Bloomberg report on whispers as credible evidence, the advantage of using the
numbers to get a head start on the herd may be tapering off. With the Nasdaq in
solid bear territory, it will be interesting to see how the new numbers come in
for this earnings season.

When I’m looking to
trade in or out of a stock near earnings season, I will go to five different
whisper sources on the Internet to get a heads up of what might be coming. The
numbers are published a few weeks before the actual earnings are announced. I
have found using various sources a great way to get a lead on a company poised
to move on news of a positive earnings report.

It happened with
Openwave (OPWV) last January when the analysts had the earnings in negative
territory and the company actually reported .09 cents per share. One of my
whisper sources had the stock in positive territory at .03 cents per share, and
it gave me early warning for a surprise. In keeping with the philosophy that
whisper numbers are not any kind of buy signal in and of themselves, the proper
modus operandi would be to watch the price action in the stock for signs of a
reversal. In this case, OPWV reversed with a vengeance into a rally that gained
over 100% in one month.

Most recently, Red
Hat (RHAT) surprised with 0.0 earnings while the official consensus was -.01.
The stock broke its downtrend and gaped up the next day into a pullback that was
30% off its pre-earning’s close. If you have the risk tolerance, one way to
trade this would have been to find out exactly what day that earnings
announcement was to take place and then place a buy stop a quarter of a point or
so above the close of the day before. Again — not a strategy for the
fainthearted! Again, weeks before, one of my whisper sources had accurately
predicted this earnings surprise.

In this example with
Broadcom (BRCM), the stock was in a downtrend, but then experienced an increase
in buying pressure a few weeks before the earnings announcement. There were
whisper numbers suggesting they would top analysts’ expectations. Look at the
outside day on a sharp increase in volume that occurred shortly after the
whisper numbers were released. Outside days (higher high and lower lower than
the previous day) often accompany changes in trend. But as you can see, the
stock entered a downtrend once the actual earnings were released. Wall Street
obviously wasn’t impressed when the company topped earnings. I’m not going to
try and account for a subtle increase in volume from the time the whispers were
released to the time of the announcement, but I could argue that the whisper
numbers had an influence on the run-up in the weeks before the announcement.
Their popularity is increasing.

Again, because
whisper numbers shouldn’t be the only piece of information used to make a
decision, I will crosscheck a potential breakout or breakdown with chart
patterns and indicators to get a picture of what could happen when the earnings
report is released. The numbers also serve to help me dodge potential surprises
on the negative side. With the ever-changing world of the Internet and the stock
market, it will be interesting to see how this little measure of sentiment holds
up.

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