Hey 5-Star Trader,
As we’ve spoken about previously, Netflix (NFLX) is arguably one of the most important technology companies to report earnings, because of the sheer fact that it comes first. Because of this factor, along with many, I will mention below, NFLX is like a beacon of light leading the way for investors throughout earnings season. This beacon can either be a bright, glorious light, leading them towards a future of hope, or a dark shadow directing them into the depths of hell.
While this used to be a good thing for the tech sector, especially throughout Netflix’s glory days of glorious bullish trends, the tide has significantly shifted. The outsized moves we saw in Netflix throughout 2018, 2020, and 2021 in particular, ironically set the stage for its ultimate demise. The explosive moves higher were off the backs of retail and institutional investors alike, as they greedily piled into the stock that continued to flout exceptional returns. It can be crazy to realize how quickly that story can change, especially when too many get stacked on the wrong side of the trade. Of course, it didn’t seem like the wrong side when everyone was singing its praises.
A Love Lost
Everyone loved NFLX for a variety of reasons. Netflix was once heralded as one of the ingenious market disrupters, one that was perfectly timed to take advantage of the challenges of the pandemic. We loved the trend and technical pattern, and mostly, we loved the love it was given. It made it almost a self-fulfilling prophecy. However, in 2021, the cracks began to show. Competitors sprung out left and right. They raised prices and started seeing real competition from others who were creating their own, unique, original content as well. They also saw subscriber growth that was led by the pandemic begin to fade.
The Fall into Earnings
It wasn’t obvious in the stock price at first, but by January of 2022, the tide shifted against Netflix. I am not immune, either. I loved trading NFLX momentum to the upside. I’m not going to tell you I called $700 as the top at the time, because I didn’t. But, when it hit $700 – and experienced a staunch reversal, and began its earnings destruction pattern began to form when for the first time in a long time, it tanked going into earnings. This was highly unusual and out of character for NFLX, and the very first sign to me that something was very amiss.
There is a pattern that appears on a bullish stock that should never be overlooked.
When a company that previously rallied into earnings religiously begins to break a bullish trend, shift to a bearish downtrend, and continually break support zones and sell off going into an earnings report – this is very bad news, and it is the most ominous sign you can get prior to an earnings report.
This is precisely what happened to Netflix in Q4 of 2022.
After this pattern formed, NFLX experienced not one but two completely destructive earnings reactions, in which it fell -21.2% overnight in Q4 of 2022, and then fell another -29.7% in Q1 of 2022. At this juncture, Netflix has now given back every gain it has made since January of 2018, and it’s fallen from the all-time high of $700 a share down to a staggering low of $212.51.
It’s also important to note that these overnight moves I mentioned, are only the actual gap caused by the earnings report. This doesn’t even count the fall going into the report, or the continued selling post-reports.
Where do we go from here?
Well, shockingly, the Nasdaq didn’t completely tank upon Netflix’s eventual 37% fall on April 20th, 2022, and only ended up down around 1% on the day. In my opinion, it’s because while the NFLX move was shocking, investors were waiting on Tesla and Elon Musk to come in and save the day, which reported after the close.
While I’m sure you’ve heard me speak Tesla’s praises on any number of occasions, and I remained bullish to neutral on this report, I’m highly concerned about market participants wish for Tesla to lead us to the light, since Netflix only pulled us farther into the darkness.
Tesla is in my opinion, the most robust company and stock in the Nasdaq right now. They crushed earnings estimates, have opened two brand new very high capacity factories, and have multiple different new products coming down the line in addition to many growing business segments (including power, solar, insurance, etc).
But, the problem is, with the Tweeter in Chief’s frequent media activities, what is going to be left to surprise investors in this report, that could actually pull the Nasdaq out from underneath all of this resistance?
Nasdaq Daily Chart 4.20.22 (pictured below)
As impressive as Tesla is, significant moves on earnings haven’t occurred much over the last year. It has gapped on average around 3% overnight. I supposed it’s not just that shocking anymore that Tesla is crushing it!
So, how can I be so bullish on Tesla, love the earnings report, but yet believe that it won’t move the needle with the Nasdaq or much with its own share price?
It’s because Tesla literally cannot save the Nasdaq alone. Netflix has set the stage, and the stage is dark, the lights are dreary, and investors are afraid. Just look at the selloffs we have seen in so many other previous COVID winners: Carvana (CVNA), Etsy (ETSY) Shopify (SHOP), Wayfair (W), Chewy (CHWY), Zoom (ZM) Roku (ROKU) and more. All of these, by the way, are all Earnings Destruction candidates as well.
While the indexes may look alright to those not looking a little deeper, there are major, major cracks in the stock market right now, and Netflix is the most obvious canary in the coal mine.
So, what am I doing? I’m still shorting Netflix, along with the Nasdaq and a variety of other Earnings Destruction names. I am not getting my hopes up for big tech earnings next week, and I’m watching large cap names with a very high level of scrutiny. Why? At this juncture, the total destruction has avoided large caps. But guess what, if and when it bleeds into them…like for example in May? That is when Earnings Destruction could easily turn to complete market destruction.
So, make sure you’re paying attention to earnings. Earnings are the beacon that light the way. They are the first heads-up we get when something is very wrong. And right now, they are showing us flashing warning signs.