Earnings Week Wrap-up and Takeaways

Stop us if you've heard this before: it’s been another wild for the stock market. A solid series of earnings releases are pulling against myriad geopolitical tensions as the market tries to find its bearings.

Major indexes posted sharp gains earlier in the week, and it looked like we’d finally found the bottom of the selloff that had dominated the week before. The second half of this week, however, has seen most of the gains from earlier in the week melt off.

We’re seeing a mini-repeat of that pattern in today’s trading: a huge surge at market open followed by a sustained selloff largely driven by dips for the FANG stocks. Markets are mixed at the time of this writing, with the NASDAQ and S&P moving into negative territory while the Dow clings to gains.

So far this earnings season, 84% of company earnings results have come in ahead of analyst projections. And today kicked off with another season of strong earnings news, including Beats from industry standard-bearers like (click each company for associated Beat Report):

But even this evidence of strong profitability across diverse consumer-facing industries doesn’t seem to be fully reassuring investors.

Wednesday, we looked at the highlights of this week’s kickoff for Q4 earnings season. That deep-dive highlighted a dynamic that’s seemed to dominate the week: a strong stream of earnings reports continue to bolster Bulls and put a floor on major sell-offs, but valuations are still so relatively high that these greats earnings reports aren’t driving the same sort of optimism we might normally expect.

Three vital strategic takeaways:

  1. Many of the firms that are managing to post consistent earnings growth are still gaining even as the broader market loses momentum: each of the Beats listed above, for instance, are still up sharply during today’s trading. That’s a broader lesson in volatile times such as these: the momentum generated by stock-specific news events generally trumps that generated by background market churn. In fact, news-based traders tend to perform even better in highly volatile environments.
  2. Managed earnings are creating an environment where a “beat isn’t always a beat.” We (and others) have been writing about the phenomenon for quite some time, but it’s only becoming more dramatic. Data on market reactions to past earnings announcements is essential.
  3. Balanced exposure to shorts and longs is a powerful avenue for risk management in the current market environment. Such diversification helps prevent losses in case of another round of dramatic selloffs.

Let’s consider a quick example of how a tiny piece of data we highlighted on Wednesday was dramatically helpful in this topsy-turvy market. Here were Netflix’s last three earnings reports going into this week’s announcement. We can think of these as a rough range of how the market is likely to react to a beat (a lot of volatility here driven by user-growth numbers that don’t show up in earnings).

NFlixEarningsResults

Netflix in fact surged 16.38% in response to this earnings report. That would be a red flag for an NQ user (who has far deeper data than the snippet above): these gains are way outside the range of recent Beat results. If they bought NFLX on the announcement, a sale at a 1-day or shorter hold time would lock in nice profits without risking the potential pullback from the initial earnings-driven surge.

How has Netflix performed since?

NFLXReview

Learning More

You can learn more about earnings here, or about how data-driven, trend-sensitive trading is leveling the playing field for smaller investors here.

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