How to Trade Earnings Expectations, Not the Reports
It’s here, the real start of the earnings season!
Earnings got off to a mixed start last week as the banks kicked off the season with some flair.
The financials – which has been the most feared sector of the market after the March meltdown – has turned into a textbook sentiment trade.
But we’re facing the opposite among the large-cap technology companies. Investors have been flooding into these companies since the last earnings season in April. The strong performance is great, but it comes with a certain flair of risk that may provide an opportunity over the next three weeks.
Looking at the Banks Earnings…
I should have seen it coming…
The banks are the most hated sector of the market when it comes to investor sentiment, and the sentiment is exactly what drives the market most around earnings season.
Coming into earnings, analysts and traders alike were eyeing the sector for signs of another failure. Instead, we got so-so results, and that’s enough to drive the sector to one of its best weekly performances.
The reason is simple… Low expectations – that means the banks didn’t have to impress with their earnings results, just show signs of life.
And that’s exactly what they did. For now, the regional banks remain a short-term bullish trade as the SPDR S&P Regional Banking ETF (KRE)’s 50-day moving average (MA50) has shifted into a bullish trend higher. I’m targeting $50 as the next level of resistance as we head into the seasonally rough August and September.
The story is a little different this week as the focus turns to the large-cap technology sector.
This is the biggest week in terms of the percentage of companies in the S&P 500 and Nasdaq 100 that will report their quarterly earnings results. Companies like Microsoft Corp (MSFT), Alphabet Inc Class A (GOOG(L), Amazon.com, Inc. (AMZN), and Meta Platforms Inc. (META) will be the headliners that will take the market’s lead.
Just because they rebalanced these companies weighting in the Nasdaq 100 – doesn’t mean they can change how important they are in an investor’s mind, that’s sentiment, baby!
To think that the market’s expectations for earnings results for the large-cap tech companies are low like the banks is foolish.
Unlike the large and regional banks – which are still trading at losses for the year – many of the Nasdaq 100 companies reporting this week are trading at or near all-time highs.
I think that you would agree, right? That’s why this week will set the real tone for the rest of the earnings season.
If you watched closely, you already got a preview of the best way to trade around earnings this week. Trade the reactions, not the expectations.
The price activity surrounding Netflix Inc. (NFLX) earnings last week is the playbook.
If you didn’t catch my summary of Netflix, click here. It’s a perfect example of what to avoid this week.
The 9% rally in shares of Netflix was a clear sign that traders were bidding the stock to perfection. The opposite of the sentiment driving the banks’ stocks into their announcements.
For this reason, the prudent trade on large-cap names like Microsoft, Amazon, Meta, and Alphabet is to allow them to move from their highs before trying to trade the earnings events.
Note that most of these names, and the Nasdaq 100 (QQQ) took a slight tumble from their highs last week after NFLX sold off after their relatively bullish earnings results. That’s a bit of a tell. The market backed off a few of these names after they saw the reaction to Netflix’s results.
How do I approach this week?
Consider two things:
- weekly seasonality is strong going into the week. This is typically the last week of seasonal strength before the ‘Dog Days of summer’ start for the market as August and September are two of the worst months for S&P 500 Performance.
- The market will look to come in and buy these stocks after their earnings results as many of them are indeed priced close to perfection.
Watch for a healthy pullback to the MA50 for most of these names as a price point to start adding shares to your portfolio or purchasing a few calls but remember that August is a slow month for the market.
Of the group above, Intel Corporation. (INTC) currently looks closest to the banks in terms of expectations from The Street.
Shares of INTC have continued to lag against the rest of the semiconductor sector as the company moves through a long shift in its business. Currently, only 30% of the analysts have the stock ranked a “buy”, meaning there is plenty of room for upgrades on any good news from the earnings report.
The stock is trading 5% higher than after its last quarterly report while the SPDR S&P Semiconductor ETF (XSD) is trading 26% higher for the same period.
Intel represents the approach that is more likely to pay handsomely during the earnings season. Maintain an eye on market expectations ahead of earnings and steer clear of those stocks that are “priced to Perfection”.
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July 24 2023
