If the market is closed do you enjoy your time off? If you are anything like me and you truly love trading that’s going to be a hard NO. Even when the markets are not open your head should be on a swivel. I know I always say we need to avoid the headline risk but, the harsh reality of our world is, headlines effect the markets price….
That’s what you have me for. I was watching the news and doing my research all weekend not just for my own trades but so I can be sure I am able to fill in the gaps, tell you what you missed, and what implications it has this week for our portfolio.
I have 5 stories that I’m going to dive into today to prepare you for this week’s trading (Hint: I am looking for a “sell the news” move thanks to seasonality and the Fed but more to come on that).
How Is Earnings Season Going So Far?
We’re through the second week of results and the 10,000 foot of the earnings season is already taking a turn.
21% of the companies in the S&P 500 have already reported earnings for the quarter. Of that 21%, 68% have beaten their earnings estimates. Now that might seem like a good thing, maybe the market is turning back around, are we in store for a bull run in the market?
NO, over the past 5 years 77% of companies have beat their earnings expectations. This means we are looking at the 9% of companies that didn’t beat earnings that typically would. The clearest way I can put this is we are seeing LESS growth than we have seen in years past, even if companies are still beating earnings there is a significant slowdown we are seeing.
The story dosent end there….
Of the 68% of companies that actually beat the earnings, they were only beating expectations by 3.8%. That’s a lot of money, yes, A LOT of money. Remember, these percentages may look good but when you can zoom out and see the numbers in context, a good number suddenly can send chills down your spine.
This should be one of those numbers for you because, over the last 5 years companies that beat earnings were exceeding expectations by 8.8%… That means even the companies that are doing ‘good’ (if we use the embellished definition) they still were hardly able to make it above the expectations that were, for the most part, hedged to begin with.
What makes this even worse is within that 5 year period I keep referencing 40% or more of it was during the pandemic. Just imagine how much worse this would look had it been a ‘normal’ 5 year period prior to today.
Now we all know the sentiment surrounding the market right now, ive asked in chat and every time you all seem to think the market is going lower. You know what is not considered sentiment? Forward guidance from companies that released their earnings…
So far there has been 11 companies who have given us guidance about how they expect to do in the next quarter. Of those 11 companies, only 1 has said anything positive. That leaves 10 companies that see the muddy waters ahead and came to us saying, “Buckle up things are going to get dicey.”
Given the facts ive just laid out, there are some changes coming that you should be aware of. Analysts are going to start playing catch up, dropping their expectations for some of these companies. That is when we see price targets drop. After that, we will see sell offs happening driving the price of these stocks right into Death Valley.
Last Week’s FOMO Spike…
That is exactly what is was, just a spike. Here are the facts.
I went over this last week when I saw it happen if you want to read the full report click here. There was 1,281 companies that saw Bollinger Band breaks in a single day and that does NOT happen. Companies like SLI, CHPT, and BYND flew through their top Bollinger Band. This is because people were starting to feel like they were going to miss the bull train.
Analysts were coming out telling you we saw the market bottom last month. They thought earnings season was going to propel us higher. Unfortunetly, that was not the bottom and we still are not there.
Included in the 1,281 companies was 55% of the NASDAQ 100 I put the list in our private Discord if youre interested.
Trading this with technical analysis is going to be like shooting fish in a barrel. We know what happens to a stock that breaks its Bollinger Bands… Mean Reversion (if you are not familiar with this concept I talked about it last week you can find that here.)
As these companies start to pull back youll find the ‘buy the dippers’ waking up and being frantic and hung over further amplifying the pull back. That is where we strike. If you have a keen eye youll catch the trade, if you don’t check out my 6 month offer for Night Trader and I’ll keep an eye out for you plus it is 68% off, you can’t beat that.
SNAP Laid It All On The Table.
Snap Chat Literally showed you EVERYTHING you need to know about this earnings season. They had high expectations, people were going into the announcement saying, “Hey Snapchat, they’re going to give us a good picture of what is going on right now not only on the media side but on the social side.”
The answers they gave us were literally perfect. We saw a Bollinger Band break and after earnings the stock tanked. I told my Night Trader members to call me out, if we see expectations come out last minute and top Bollinger Band break right before earnings we can only play it one of two ways. Play it safe and not own the stock, OR, buy a lotto ticket short position on the stock. This is almost a fact of trading earnings, at the very least this is a play you should be making on principal alone.
Apples Carbon-copy Rally
Apple is the heaviest institutionally help stock in the world right now. Intuitions are machines, they trade like them as well…
There are some interesting points on this chat, ive removed the indicators because I want you to clearly be able to see what the market is doing here. The market has been programed. The line of code making this pattern happen was put in place by institutions. When we see a 14% pull back in apple the buy orders start rolling in and you end up seeing a 20% run in the stock.
This happened twice on this chart alone but if you go back even further you will find 5 examples of hit taking place in the past year and a half.
This is an example of sentiment mixing with the institutional trade. This is basically the market saying, this is how apple is going to trade. I don’t care about the number that is coming up, I don’t even care about the short term response for a play on apple. It could be a violent move but if apple has anything to say about it they are going to try to bring this move in for a soft landing to avoid the stock tanking.
The way I see it, I’m worried more about the long term trend we are seeing in apple. We are seeing the 20 day go up but the market trend line (50-day moving average) is still following a bearish trend. Watch for the pullback in apple, I expect to see it pull back to the $143 mark. That’s where the fun starts… once we see that happen the trap door is open for the stock to fall down hard on the $125 target
Seasonality: Welcome To Week 31
Week 9 of the year was a rough one for us traders, the market went down hard. Week 31 is not that much better, it’s not as much of an outlier but it still hurts.
I know seasonality is one of those concepts that makes a lot of people think I just wear a tinfoil hat at night. It isnt seasonality is recognizing patterns and if something repeats time, after time, after time it’s not a conspiracy it’s a law of the market.
It happens every single year this data is from the past 20 years.
The red zone on this chart is the next 4 weeks of seasonality. Right next to is you see some outstanding gains leading into this period. It happened, everybody thought we were at a bottom and the market was turning around… now we are here. The markets are following their normal routine, it’s the pattern of the market.
This happens for two reasons. The volume drops off and it becomes easier for the market to be pushed around a bit. The second is earnings, during earnings season there is a bit of a tug-of-war game that happens making the markets jump erratically.
What is the takeaway from this chart, seasonality just flipped on you. Proceed with caution unless you are going to be trading the volume with Kenny and Voz and end the day in cash or, out you trades further out and let the market come to you.
I hope this helps you know what to expect over the next week.
I’ll see you tomorrow.
Quantitative Specialist, Penny Hawk
July 25 2022