Earnings Results vs. Reactions
When Results and Reactions Don’t Match
Going into earnings season, investors (myself included) were weighed down by the pervasiveness of negative fundamental data that was surely going to have a negative impact on earnings season. We knew that inflation was high. We knew that consumers were getting squeezed by that in addition to a variety of other factors including the strong dollar, rising interest rates, falling saving rates, job cuts, and more.
But, that is the thing about the stock market. When something is know, especially bad news, it simply doesn’t provide the shock to the system that it otherwise would. When earnings season came around in January of 2022, and then again in April of 2022, companies like Walmart and Target shocked investors by noting significant miscalculations and rapidly onset shifting macroeconomic conditions. For example, last quarter, Target fell 24% overnight on reports that they had far too much inventory, shoppers were changing habits and they not only missed estimates but didn’t have a positive outlook moving forward.
This piece of negative news came after a previously rapid rise in the company’s stock price, as consumers flocked to stores like Target with their stimulus checks and spent time and money reorganizing and decorating their work from home spaces. And, it was a shock to the system because it was unexpected. However, Target just reported results again and this quarter, noted pretty much the same issues. The market’s response was quite different, however, as Target ‘only’ fell 3%. It wasn’t because the results were significantly better or showed signs of improvement, but merely because at this juncture, everyone knows what the primary issues are and that they are pervasive problems. The results weren’t all that surprising.
So, what does that mean? It means we are in a market where companies can note a slew of bad news, their stock can fall 3% overnight and then still be bought the next day on the dip. It means that the reaction to this quarter’s earnings reports and last quarter’s reports are also completely different, while the data itself is largely the same.
Check out a daily chart of Target in the Hot Zone below:
Positive News and Massive Moves
If companies can fall slightly, within an expected range, after terrible misses, what about those that surprise? Let’s take Walmart for example. Walmart pre-announced bad news just a few weeks ago, and took the rest of retail and consumer staples down with it – albeit briefly. This bad news was therefore expected and known by the time the full on earnings report came out, and due to this bad news being priced in, Walmart was actually able to not just break higher on earnings, to a tune of 4.8%, but it also recovered above a massive area of resistance at the 200 SMA on the daily chart. The gap higher in and of itself was significant, but it was especially the break above this key resistance zone that now solidifies that area as support, that mattered even more.
The irony that this kind of move could occur shortly after the company lowered estimates for the next year and noted a slew of ongoing headwinds is not lost on me.
Check out a daily chart of Walmart in the Hot Zone below:
Where To From Here?
The irony of the whole, ‘bad results, stocks rallying,’ is not lost on me, but it’s not just about earnings. It’s also about peak bearish sentiment, which we hit in late June/early July when the put/call got so high that it was comparative to the bearishness experienced during March of 2020 in the midst of the COVID crash. Once everyone caught on to how easy and obvious it was to short on earnings and short relative weakness areas of the market, the easy trade got far too crowded and lopsided, and resulted in incredibly high short interest in these fundamentally weakened areas of the market.
What does that mean?
It means that not only could market participants not be shocked anymore by bad news, making the news less jarring, but many of them were also on the wrong side. So, when sentiment peaked and too many were left short, not only did buyers come in after finding some confidence but short sellers had to get out, causing upside movement despite negative underlying fundamentals.
As such, as crazy as it sounds, it’s entirely possible that the macroeconomic situation continues deteriorating but tickers explode higher. Crazy, right? Well, that is the market we are in.
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