Sitting Out Earnings?

Hey 5-Star Trader,

Earnings season is right around the corner and usually this is one of my favorite trading times of the year. However, as outlined in last week’s newsletter* there are a few outstanding factors that are making me a little nervous going into this quarter.

*Recap: In case you missed last week’s newsletter, we discussed inflation, supply chain issues, and the Federal Open Market Committee (FOMC). Read the full article here.

In addition to those concerns, typically quarter three is my least favorite earnings season of the year. This is because it tends to be the weakest and is coupled with September/October seasonality struggles. As a result, we tend to see a lot of outsized movements during this quarter.

We have already seen some outsized movements throughout September and I would actually caution investors that this earnings season could bring about even more volatility especially due to the current supply chain disruptions.

As a real-life example of this, let’s inspect Nike (NKE). Last quarter Nike exploded by over 20%. This is normally a situation where I would see a “run into earnings” opportunity the next quarter. Instead, this stock gave back most of the gains it made last quarter. Recently Nike gapped lower, all the way to the 200 simple moving average (SMA) after supply chain disruption news.

As such, I’m not trading earnings this quarter with this setup as heavily as I normally do. I do think there are still a few potential possibilities that are standing out from the crowd. Names I’m watching as reporting begins include:

Tesla (TSLA), Microsoft (MSFT), Google (GOOGL), Advanced Micro Devices (AMD), Datadog (DDOG), and Cloudfare (NET).

These companies have seen very solid patterns prior to earnings and historically they come through regardless of market condition. That being said, I would highly recommend using caution as we work our way through the next few weeks.

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