Let’s take a look at how this earnings season has altered the market, forever.
I feel like I’m beating the same drum these past few weeks… but when every major company is reporting earnings, and we haven’t seen a market like this since the 2008 recession (possibly earlier), there’s a lot to discuss.
So for today, I’m going to tell you what the current earnings reports mean for the market as a whole (i.e. how it’s changed the structure of the market going forward), how it’s probably only going to get “worse”, and of course, what I’m trading.
My hope is that this’ll provide you with the opportunity to understand this new market structure, but more importantly, how it makes us money…
The resolution of this week, and the overall sentiment that comes out of it, will determine the direction of the stock market for the next several months. If enough companies are unable to maintain the goals they set forth… the whole market will tumble.
This earnings season, we’ll see which companies executives have done a good job at managing investor expectations — and which have not.
Those who fall short of expectations, and lower guidance, as Caterpillar did Monday morning, will be hit by selling, and hard. Conversely, companies that continue to perform, such as Xilinx (XLNX) and Lam Research (LRCX) will fly. For instance, XLNX has been up since Monday.
What does this mean?
The days of broad market earnings rallies are over, as are the years of a steady trending, bullish market. This is a stock pickers market, and investors need to be educated and choose carefully. (Stick with me, and we’ll strive to do just that.) They must look for companies in spaces with little China exposure, in growing industries (cloud space, semiconductors, health care — I talked about these briefly Monday) that are fundamentally and technically sound.
The economic slowdown in China, along with effects of tariff wars, are on display this earnings season and can’t be ignored… as I’ve been saying for the better part of a month now.
Any company with large China exposure is at risk, particularly industrials and transportation stocks. As the Chinese economy continues to slow, it’ll continue to send reverberating effects throughout the world. Emerging markets especially will get hit, as they depend on China to buy goods from them. US companies that depend on Chinese purchasing power will continue to see shortfalls in revenue.
The most problematic part…
We’re only beginning to see the results of issues with China that will be further exacerbated by the economic effects of the government shutdown. The biggest problem I see is that we’re at the highest levels of consumer and corporate debt in our entire history. As revenue shortfalls hit, that results in companies laying off workers (take TSLA for example), and now you have both companies and consumers that can’t pay off their debt.
Then it all goes kaboom in what will be called the debt bubble.
As for earnings this week, here’s what I’m looking at, and my thoughts on AAPL’s report:
I’m bullish MSFT, MRK, V but I can’t see how TSLA and BA will be able to make it through this season unscathe (I talk about why I don’t like BA for a day trade further down).
Now as a major component of the Nasdaq, the gap up higher in AAPL has given us a gap higher in the Nasdaq as well. As of this writing, at 8:45am CT, the Nasdaq is currently up 1.3%, and AAPL is up 4.5% on a move of about $7.
Remember, you always have to look at the market maker expected move, as well as overhead resistance, on an earnings move like this. While the move in AAPL is positive, it’s moved within the expected market maker move ($8). This is a number you can see in your platform prior to the report.
Generally, on a move within the expected range, while it looks good, it usually fades. So, for me it’s not a good day trade buy but does show more promise for a long-term hold than it did yesterday. It’s also helping push MSFT higher. There was a lot of positive news in this report.
CEO Tim Cook pre-announcing the issues with China earlier this month ‘priced-in’ low expectations, and he even mentioned that ‘he sees some hope that US/China tensions have eased.’ That’s the critical part of this report, because everyone is looking for evidence of impact of China.
Think of it this way. It’s like when your kid tells you they’re barely passing a class, then they come home with a C. Surely, maybe in normal circumstance you were hoping for an A, but since you already figured they were failing, a passing grade makes you happy and shows some promise. You’re happy because you thought it would be worse. Tim Cook almost surely saved the stock from a quick hit. The report shows positivity in the services segment — exactly what AAPL needs, growth in this segment. AAPL needs to expand into other areas such as expanding service offerings because its China and hardware reliance negatively impacts its bottom line (I wrote about this a few weeks ago in depth).
So, what’s the pattern here?
Well, when the report is better than expected especially after negative expectations, the stock trades higher — but the question is, does it have follow through momentum? This’ll be the case with many other companies this season.
Now what about looking forward?
Look at Boeing (BA) today, for example. It’s widely expected that industrial companies will be hit by the slowing Chinese economy as well as tariffs, however in this instance, Boeing remains strong, and it gaped up 6% overnight. But, it doesn’t have follow through. So, for a day trade, I’m not very interested.
I’m looking for companies that surpass expectations, and show follow-through momentum for day trades. For long stock buys, I wouldn’t buy a gap up on earnings, but, after the price comes back and stabilizes, it can definitely be a good long term add (like BA, AMD).
Looking into tomorrow, AMZN’s cloud revenue is critical and historically doesn’t do well the last quarter of the year, but I remain bullish AMZN both short and long term. FB and QCOM are losers for me.
Regardless of what happens with these report, expect the market to move — it’s going to be a very volatile week. After it’s over, we can identify the heroes and zeros and go from there.
P.S. I’ll be posting another issue Friday to wrap up this big earnings week as AMZN and MSFT report tomorrow after the close. Be on the lookout for that!