And why you should especially care about them around earnings season.
In Monday’s issue, I went through a few various sectors and identified the strength and weakness I was seeing, and demonstrated that I’d focus on these sectors in ‘if, then’ situations.
Why?
Because, from week to week, especially during earnings season when the market can behave like a 5 year old that’s had too many donuts, we have to do our preparation and know where to focus.
In today’s issue, I’m going to break down banking stocks and teach you a little something special along the way…
When making trading decisions, we are starting with probabilities.
“If bank earnings are positive, this will most likely send these sectors, along with the stronger sectors in the markets, higher. We don’t know what earnings will be, so let’s identify the stronger sectors, along with lower time frame setups, so we can be ready when we get the results from the binary events.”
Conversely, to the downside, it looked like this —
“If bank earnings cause a negative investor reaction, this will most likely send this sector, along with some of the weaker sectors, to the downside. Let’s identify areas of weakness that we can use to follow this trend to the downside, on a short-term basis.”
Why were bank earnings so important?
The broad stock market sell-off we saw in November and December largely began with fears of rising interest rates slowing the economy, corporate profits slowing as demonstrated through missed EPS estimates and lowered guidance, and fears of tariff wars with China further impacting economic growth. While this wasn’t entirely the full cause and I’ld argue that the slide we saw in December may have began with worries but ended with pure emotional panic, any indicator that follows up on these fears is critical to the overall state of investor confidence.
Then, after the rally the last two weeks, investors are looking to earnings season to tell us *IF* there’s indeed a problem with the economy.
So, what happened?
Citigroup ©, Bank of America (BAC), and JPMorgan (JPM), three of the countries biggest banks, came out and said how strong their earnings seasons were, assuaging a lot of these fears. The executives have stated that their reports demonstrate confidence in both the consumer and business areas of their businesses.
Banks make money from loans, especially the interest on those loans. When people are taking out loans for cars, businesses, houses, etc, their business is strong. Conversely, a slowage of this activity demonstrates a slowing economy, but banks have had some of their best trading and reports in the last 10 years.
What does that mean?
Well, the overall switch in pattern on the daily charts shows me that banks could continue higher this year, and break their bearish trend of 2018. I’m considering that we may return to a bullish trending environment in XLF like what we had previous to last year.
This caused a reverberating effect through the market, sending especially the consumer discretionary and tech sectors higher. As such, this is where I focused my trading this week.
Amazon (AMZN) and Nike (NKE) were clear areas of focus, as they’re top weighted products within XLY, and because they had lower time frame squeezes. As such, I added shorter term plays on both. Amazon had a kicker especially because it’s experiencing the ‘Run into Earnings.’
The ‘Run into Earnings’ is one of Henry and I’s favorite setups we trade every quarter. We like to identify bullish stocks that typically ‘run’ into earnings, trading the movement in price and implied volatility along the way. Henry and I taught a webinar this week for member’s on the basis of this strategy. If you’re an Options Member, you can check it out here.
If you’re not a member, you can check out a free overview of this strategy here.
You’ll be hearing a lot about this strategy the next few weeks, and then again every quarter. Personally, I love to combine it with my Five Star approach.
Well, this week is about over, and I’ll be wrapping up some of my bullish trades and looking to areas of the market to short after the strong rally we’ve seen. I also have my eye on Netflix (NFLX) earnings, the first of the FAANG’s, to potentially fuel the FAANG ‘Run into Earnings’ with fire.
Keep an eye out for those, in the next issue!
Danielle,
Your the best!
Thank you for sharing all your wisdom with us novices.
I seem to recall that you were looking at bearish plays in the XLF sector the week prior to earnings?!?
Perhaps I misunderstood.