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1.15.2020 - Free Investing Newsletter Bookmark

Earnings Season
 
Every few months throughout the year, we have to endure something called Earnings season. Actually it’s 4 times, and they follow the 1st, 2nd, 3rd and 4th quarter of the calendar year.

 
Earnings season is where the corporations tell the public how their business is going, how sales were, how expenses were, and the bottom line, how much profits rose ( or fell)
 
We are at the beginning of Earnings season now, and one of the “rules” of swing trading that I have lived by for over 25 years is “Don’t hold your stock over earnings release date.” So let’s chat about that in a minute. First this:
 
Earnings are what’s supposed to drive stocks up or down. Well there’s been a horrific perversion to that theory and it comes to us from those despicable “Federal Reserve” people and Central banks the world round.
 
See, in the past, it was indeed “earnings” that forced your stock higher or lower. If you were in a company that was experiencing organic sales growth, and overall revenue growth, while keeping your expenses low, you’d have rising profits year-over year. So investors would reward you by buying into that growth.
 
Now of course it’s all about the Fed, and their insane money pumping. It’s not even a secret any more, they have said so themselves. Just recently a Fed head admitted that without the Repo activity since September the market would probably be lower. Ya think??
 
Anyway, the Fed’s have distorted the hell out of the markets. There’s no real price discovery anymore. Who knows what a stock is truly valued at, when it’s being driven higher by an influx of freshly printed money?
 
Consider the ETF’s. When fund managers and institutions get a fresh boatload of money, they don’t want the time and expense of actually doing due diligence on any particular companies. They know that all they need to do is buy the SPY, or DIA, or SMH, or XLF, etc and get rewarded.
 
Well the problem with that is that it distorts the price to earnings picture on the companies in that index. Let’s think about it like this, the SPY is the ETF for the S&P 500. Now, while they suggest that the S&P 500 is a group of the biggest, best, most solid companies in the US, let’s not kid ourselves. Not all of them are making money.
 
BUT and this is important. When someone buys 10 million shares of SPY for his pension fund, or mutual fund, or what have you, the ETF manager dices that 10 million up and EVERY stock in that index gets a slice. No they don’t all get equal weights, but they all get bought up.
 
So let’s say you’re the XYZ company, and sales have sucked some, and you’ve had some expenses rise that you didn’t count on. Obviously you’re stock should be sluggish if not in a downtrend. Well, if you’re in that ETF however, your shares are going to be bought up every time the SPY is bought up.
 
Over time in a rising market, your stock could be up significantly higher than it should be trading at. Your price discovery is being distorted by the fact that people aren’t buying your individual stock as a solid investment, the SPY management equation is buying up your stock just because you’re in the index.
 
So, this is NOTHING but “multiple expansion.” In other words, earnings are actually down about 2% year over year, yet the market has gone higher, much higher over that year. Which simply means that “P/E” ratio’s are being stretched. As I said last week, the 12 month trailing PE on the Russell 2000 is an eye watering 39.
 
Who wants to pay 39 times earnings for anything? Not me. But just like the D&P or DIA, if funds buy into the IWM which is the ETF for the Russell, then those individual stocks will go higher. It’s very sad.
 
Okay,with that as a backdrop, we head back to my premise that we don’t hold our short term holds over an earnings release. Why? You have NO CLUE what they’re going to report, and if they don’t like your report, your overbloated, insanely priced stock is going to suffer.
 
An example is FIVE. For the past 4 months or so, FIVE was trading in a range between about 120 and 132. But then a couple days ago, they had to plead their case, and it was ugly. December sales were down, they didn’t make the numbers. They fell over 26 bucks that day.
 
They closed on Friday at 121.23. Then Monday came and they told their sad tale. They gapped lower at the open and fell from there. At one point down to 95 bucks. Imagine if you were in that stock. There was nothing you could do. Gap downs are horrific things that should be illegal,but they aren’t. You go to bed Sunday night with FIVE at 121, and before the market even opens for trading it’s indicated to open at 96.
 
THAT is the risk you have of holding over an earnings report. It can hit just about anyone, because again, you have no idea what they’re going to report, nor how the “Street” is going to take it.
 
YES there are times when someone releases earnings and “boom” they’re gapping up 10 bucks the next day. But do you know if that’s going to happen to the stock you’re in? Back in April, the “all powerful” Google closed the day at 1,287. The street didn’t like their story on earnings. It opened the next day at 1,188. A hundred points gone “poof”
 
I’ve run the numbers in the past and the bottom line is that the risk to reward for holding over an earnings report is slanted towards too much risk, and we don’t do it.
 
Over the next two - three weeks we’re going to hear from thousands of companies. If you’re holding individual stocks, it is worth your while to look up their earnings releases and maybe selling out a day ahead of their reports. Hey, if it’s a good report, you can buy right back in and hopefully ride it higher. But if it’s a hairball and they fall 20 bucks before the open, you just saved yourself a years’ worth of lost gains. Think on it.
 
The Market:
 
By the way, with regards to what I wrote above, did you see Target today? Here’s one of the top tier retailers, and when they announced earnings suggesting Holiday sales weren’t as robust as everyone wanted, stockholders were treated to a rather rude 9 point Gap down.
 
Again, that’s precisely why I try not to hold over earnings.
 
Okay, so today was China deal signing day. There’s a lot of pushback from folks suggesting it’s a nothing burger, we don’t know what’s in it, and blah blah blah. Some are even suggesting “China punked us”.  
 
Like really? Did you see the faces of the Chinese delegates that had to sign that deal? They didn’t look very happy to me. Also, if China punked us, why did they even come to the table considering we’re still beating them silly with tariffs? Why didn’t they just give us the middle finger and laugh at us?
 
Because as I’ve said, CHINA NEEDS US just like we need them. But for decades they were getting away with a little more here, alittle more there. No one stopped them. No one wanted to rattle the great dragon. Well, Trump rattled them.
 
Is the deal great? Probably not. But it’s a start. You do NOT reverse 40 years of getting screwed in one trade negotiation. Sorry, that’s TV fantasy stuff. You do it in increments, just the way they got things so perverse to start with. A little at a time.
 
Now, I’ve said for quite a few weeks that I thought we’d see the market rally in the beginning of January, and then possibly see them use the China deal as a “sell the news” top. So, today’s action was very interesting.
 
Heading into the signing of the deal the DOW was up 160 points. Then moments after the ink hit the paper, it started sliding. + 140, + 120, + 110, +100, + 90. They halted the slide there, and bumped us back up. By mid afternoon we were back to + 125.
 
But heading into the close, the evaporation began again. The S&P, which had at one point been up 15, closed up 6. The DOW went out at +90. So, you can see that there was “some” selling of the news.
 
The question is, will this blossom into some real selling over the next few weeks? I think it “could” Remember, it wasn’t my position that the news would hit, and we’d instantly roll over and puke. No, more along the lines that the deal could spark one last Hurrah higher, a blow off top sort of thing.
 
Let’s give it several days before we really know if I’m all wet and we’re simply going higher, or if indeed this is going to market a temporary top.
 
In the meantime, we’ve been having some fun in market land. I mentioned to my readers yesterday morning that I liked the chart on SHAK and if it got up and over 63.00 that would be a good entry for more gains. Well it did that, ending the day at 64.10. Not bad. But today it gapped UP like crazy and at one point was up to almost 72! So, we sold half the position on that big pop.

We took some profits on AMD, and sold half our SQ for a quick buck and a half. All in all, it’s been fun. But I also think that we might be topping here, so we’ll pull in our horns a bit.
 
I know that suggesting the market might pull in, is almost lunacy, since it’s rigged to go up. But even in the mad days of the tech bubble of the late 90’s there were corrections. Let’s see if I’m nuts, or over the target. We’ll chat Sunday.

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