Q1 Earnings Season Will Refuel the Bull Market
Our daughter got a promotion at school.
She was promoted to prayer leader — she gets to lead the class in prayer.
She’s five, so it’s always fun to hear what she prays about.
Last Monday, she didn’t pray for good grades. She asked for her teacher to only put good grades on her report card.
Clearly, she doesn’t get how this works.
Her teacher merely reflects the work she has done.
It’s up to our daughter to earn the grades — not for her teacher to grant her only good grades.
As we head into the heart of earnings season, it’s important to keep this in mind for the upcoming earnings report — essentially a report card.
It’s merely a reflection of what the company’s done.
This earnings season is poised to be an important one.
It will act as a critical indicator for our economy as the government shutdown takes its toll.
Many companies have reported struggles due to tariffs, rising rates and trade disputes with China since last quarter.
The shutdown is just another uncertainty on the economy.
Corporations may ask analysts for mercy when they post their earnings reports.
But it’s the companies’ responsibility to shed some light on how the economy is doing.
In this quarterly earnings season, investors are expecting to see the largest stock-price jumps since the financial crisis.
The direction of stocks’ pops and drops is the overall indicator of the underlying economic strength.
Measuring “Implied Moves”
The implied move, the stocks’ jump that traders are expecting to see, is 7.4%.
You have to go all the way back to the second quarter of 2009 to find a higher reading.
The dark-blue lines on the chart below show the implied moves.
Even though stocks fall short of the implied moves — noted by the light-blue lines — they still follow the general direction of the implied moves.
The trend right now points to a volatile season.
Keep in mind that volatility doesn’t mean a crash.
While some stocks will decline, volatility can also be an upside.
It could push stocks up more than average after an earnings report fueling the new-year rally.
Here’s why I expect a rise this time around — and why now is a great time to invest.
The Bull or the Bear — Which Direction Will the Market Take?
Corporations announced that results were cooling off, but investors ignored the signs. I have been talking about it for months.
Investors didn’t listen after the second quarter, pushing stocks higher regardless of changes in guidance.
That created the volatility we saw at the end of last year with October’s market correction.
Worries continued to increase as more companies lowered their guidance.
And investors’ panic in December made the correction worse.
Analysts’ reaction last quarter tells me that a lot of the negative news is priced in.
Investors are aware of a slowdown in growth as the negative impacts of the trade war with China and rising interest rates take their toll.
This earnings season won’t be about beating expectations or posting record results.
It’s an earnings season that can keep the bears quiet as the outlook improves or remains steady — after the third quarter’s abysmal guidance.
Investors put plenty of cash on the sidelines in December. Any positive developments this earnings season will be enough to bring them back.
It will help create an uptrend with the Christmas Eve lows being the turning point.
So, watch this earnings season closely.
While corporations may be praying for good reports, analyst reactions will be the ultimate indicator for our current economic times.
Regardless of what this earnings season brings for the market, it doesn’t warrant gambling on stocks before they report earnings.
While this is a great time to invest, it’s not a time for placing bets on which stocks will pop or drop on earnings. That’s an odds game you don’t want to play.
The best way to profit from earnings season, as I have mentioned before, is to ride the earnings drift.
The period after a company reports earnings can be highly predictable based on the results and on analysts’ reactions.
It’s by far the best way that I’ve discovered to profit from earnings season. And it’s exactly what I plan to do in the coming weeks to generate substantial profits.
Chad Shoop, CMT
Editor, Automatic Profits Alert