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Earnings Season & Your Stocks

Earnings Season & Your Stocks

The big question…

Why is XYZ stock down, when they had great earnings?

I know it can be jarring, but it all boils down to this: supply and demand.

There’s always extra volatility during earnings season. But don’t get caught up in the short-term noise.

We’ll tell you what this earnings season means for your stocks — including Tesla (Nasdaq: TSLA).

In fact, earnings volatility actually creates a great buying opportunity in options. Plus, we’ve got a super bullish Ethereum (ETH) prediction to share with you.

Check it out:

TSLA and AMD Great Earnings = Stock Tank

Paul: I can tell you at least two portfolio companies that reported and had great earnings — Tesla, AMD — and their stocks were up in the pre-market yet during the day they were flat or went down.

Ian: I get that question a lot too. It can be jarring because you see the company reported way more sales or profit than they were expected to and then the stock is down 5% or something. That can cause a lot of confusion. It really does all boil down to supply and demand.

Around earnings time, especially right after a company reports, there’s a lot of volume. That can produce pretty big price swings in either direction. It matters whether or not a lot of that volume is directed toward selling or buying.

Just because a company reported good earnings doesn’t mean everybody is going to jump on that and buy the stock. Sometimes some investment firm wants to sell a big chunk of stock and hasn’t had a good opportunity because there’s not a big amount of volume.

So at a time like right after earnings, they finally get a chance to do it. The amount of stock they want to sell still pushes the stock down overall. Of course that can trigger stop losses and things like that and cause panic selling. It has a snowball effect.

It’s been the case with a few companies I have seen so far. They report great earnings and everything they said in the earnings call was very positive, but the stock is down. That’s the basics of why that happens.

Paul: The other thing I can tell you from my experience managing money is that there is a group of hedge funds and maybe even traders with enough money who call themselves proprietary traders or family offices who actually bet earnings like an event like it’s a horse race.

They will buy options ahead of the event and immediately they will know, based on whatever data they compile, whether or not other traders are going to come in and bid it up and have that surprise pop. If there’s no surprise pop in the pre market or after market, they dump all that stock immediately at the open.

Now regular investors, position traders, someone who is building long-term positions like ARK Invest, whatever buying they are doing is overwhelmed by this dumped selling. Many people don’t understand that prices are not set by some committee or some direct calculation between earnings and the stock price.

Many people think the time on a clock is set by the movement, people think a stock price and earnings are one-to-one correlated. The truth is, as you said, they are set by demand and supply and the interaction of buyers and sellers who buy at different prices for all kinds of reasons.

Only they know the reasons. They may have too much stock relative to what they thought the earnings were going to be, they may have too little stock, they may be short the stock and have to cover it. There are hundreds of reasons why somebody can choose to buy or sell at different prices.

The amount of stock they have will dictate the stock price they get. If somebody is short in a big way, they will be forced to bid it up by the market makers and you will get this big pop. However, if they loaded up ahead of earnings and it doesn’t happen, they are forced to dump it.

Now you have a 10%, 15% or 20% drop in one shot. Post that moment, which can last a week or two weeks, regular buyers who are buying for longer term come back in. Those big movements can simply be washed away.

Ian: That’s one of the things I’ve noticed. I’ve seen it a lot where a stock will go down after earnings. Obviously someone wanted to sell a large amount for whatever reason. Then that snowball effect I mentioned earlier takes place. A few weeks later the stock is right back where it was or higher.

That has happened with growth stocks and America 2.0 stocks quite a bit. I would not be surprised if it happens again. There’s demand for these companies. There’s demand for disruption. As we have seen the past few years, these stocks have been moving up at a quick rate.

There is going to be volatility at times. It just happens that the time of extra volatility is around earnings season. Short-term noise is not something to get too caught up in. Overall, I believe demand is still there.

Paul: 100%. People have to understand that earnings events are when there’s the most liquidity. Someone who wants massive liquidity, who has a large block of five million shares, that’s the moment they might dump it. There’s a lot of things going on and many folks think something is wrong.

Oftentimes it’s just a matter of liquidity positioning relative to what their accumulated position was prior to the event. There is a shocking amount of speculation around earnings in particular because it’s a guaranteed four times a year event. You run one of our services where we look to take advantage of this.

Ian: It can definitely make for some good buying opportunities if there is a big drop after earnings. Like I said, a lot of the time a stock will just shoot right back up.

Paul: We have a service called Rebound Profit Trader that Ian and I manage where we look for moments like this. We look for this big block selling unrelated to longer-term accumulation that we feel is going to come back.

If you combine that with options, that service last year was the perfect time for that. What was our record last year?

Ian: I think we had 62 wins and four losses last year.

Paul: That’s amazing. I don’t think that’s within most people’s probability structure. That’s phenomenal. Ian is the primary trader in that. We collaborate in terms of names, general market direction and things like that. That’s astonishing, Ian. Well done.

If you are interested in our services, we generally tell people to try Profits Unlimited. It’s our base-level service. It goes for $47 if you go to ProfitsUnlimited.com. If you are interested in Rebound Profit Trader, you can check it out here.

It’s an option-based service and one of our few trading services that we have. What’s the timeframe on Rebound Profit Trader?

Ian: We try to get in and out of a trade between four and six weeks.

Paul: It can last longer, but if you are looking for shorter-term that’s where you’d go.

ARKK, the S&P 500, NASDAQ and America 2.0 Stocks

ARK Invest’s main ETF (ARKK) that it had strong correlation to what we refer to as America 2.0 stocks and Fourth Industrial Revolution stocks.

You mentioned something that suggests our stocks, growth stocks, innovation stocks, may have hit an inflection point. You mentioned something with respect to ARK Invest.

Ian: This is about moving averages. We don’t usually get into super technical analysis or things like that, but sometimes these moving averages we look at can be a good guide for what the stock has done in the past and how it relates to that. One of the things we look at is the 40-week moving average.

Based on what we saw last year with growth stocks after the crash, a lot of stocks bounced off that 40-week moving average or bottomed out right below it. We are looking at that again because of the selloff in growth stocks. ARKK went right down to that 40-week moving average.

It bounced off it again. So I think, not just based on that, but I think that trend is still being upheld. I think demand is coming back in to ARKK. Earnings might ultimately boost that. We’ve seen good news come out for a lot of companies that have reported so far.

I think investors are a little on edge about what’s going to happen in the market because of the selloff we’ve seen recently. It might just be a security measure. I think as more good news starts to come out there’s going to be a buildup back in demand. America 2.0 stocks in general are going to move back up.

Paul: You also showed me a chart earlier this week on something you keep track of, which is our watchlist. Call volumes are rising for our watchlist.

Ian: Yes. We have a watchlist of about 200 stocks. Every day I track the amount of call buying at or above the ask price. I call it bullish demand and bullish volume because it’s people buying at the maximum price at any given time.

During the worst part of the selloff in early to mid-March, around 10-15% of the stocks on that watchlist had above average bullish volume in call options. Recently that shot above 30%, which is the highest it’s been in months. Option volume is going back up, more importantly, call option buying is going back up.

It shows demand. That can be a leading indicator for stocks. When you see people betting on options it’s a good sign. It’s more risky. It’s a higher conviction bet than just buying  the stock. Usually stock demand will follow that.

Paul: I agree. It mirrors an old Wall Street saying: Never short a dull market. It does feel, with respect to our stocks, they are just doing this [waves hand up and down] without going anywhere. Sort of just grinding through.

I want to put up a couple charts for people. Year to date comparing S&P 500, S&P 500 equal weight, Nasdaq, ARK Innovation ETF and the Russell 2000. The S&P is flat for the year. The S&P 500 equal weighted version we both track, which as we know is a bullish sign when it outperforms the cap weighted, is up 5% this year.

ARKK ETF growth 2020-2021 graph

The Nasdaq Composite, which has a lot of America 2.0, Fourth Industrial Revolution companies is down 1.6%, which is extraordinary given how far up at one point it was this year. ARK Invest, you can see at some point this year was up as much as 24%. It’s actually in negative territory for this year now.

That’s almost a 30% swing on ARK Invest, which is similar to a lot of the behavior in our stocks. The last one I have is the Russell 2000, which also got up about 16% is now only up 8%. However, that’s a huge index with thousands of stocks. Whether it be our portfolio, which we use equal weighting to track, or ARK Invest, we are much more focused.

We are going to be much more volatile. Even though I can tell you our tracking shows we are hanging in there. The second thing I want to share is the performance of all these indices since the March bottom. One of the things we get questions on is why XYZ stock is down 20%, 30% 40%.

top index performance 2021 graph

However, when you look at this chart it tells you there was an extraordinary move between March 2020 and February. It’s interesting. It’s almost like all the stocks had one day they peaked out around February 15. The equal weighted S&P 500 is up 111%. S&P 500 is up about 90%.

The Nasdaq Composite is 107%. ARKK, even after the correction, 222%.

Stock Market Corrections are Normal!

My point in bringing this up is that these kinds of corrections, how many can you recall in the four years we have been together?

Ian: In America 2.0 stocks, at least five or six.

Paul: For sure in 2018 we went through one of these. In 2019, it might not have been a 50% swing, but we had a big correction. Then March of last year was just the whole portfolio.

Ian: Everything was down. Housing stocks were down 90%.

Paul: We have a lot of newer investors coming in who have very short timeframes and think that should be their default. One of the things I have been pushing out repeatedly on Twitter and in our updates is that our timeframe is a minimum of one to three years.

Is there any stock we have invested in that has not gone through a 50% correction on the way to generating huge gains? Can you think of a single one?

Ian: I don’t think so.

Paul: Right. This is par for the course. This is what happens in growth stocks. If you come in late, somewhere near the end, it’s almost certain you are going to have to sit through one of these.

Ian: It happens all the time. There’s been a lot of these since the beginning of 2018. It’s just part of the game with growth stocks.

Paul: Bottom line, we are unchanged in terms of our view. We are still, as I like to say, bullish optimistic positive — BOP — on our stocks, America 2.0 stocks, Fourth Industrial Revolution stocks.

Before we close out the stock section, I was looking at Wells Fargo and these companies that are inevitably going to go to zero. What do you make of this rally in these stocks?

Ian: A lot of these companies have been rallying significantly. A lot of the Dow companies, Berkshire Hathaway holdings and America 1.0 companies have been rallying. I think this is part of the whole narrative with the reopening trade. They wanted to get into things that hadn’t rebounded yet.

I think that’s one of the main drivers of this trade. That can last a few months, but in terms of long term I don’t think that rally can be sustained. It might just be a dead cat bounce for a lot of these companies. I still really believe a lot of the demand is coming into newer stocks.

A lot of the stocks that have just come public within the last couple of years the bigger firms can’t even buy into yet because they are still too small. I think it’s just a short-term reallocation into these reopening stocks.

Paul: I can’t prove this and people will probably scoff at it, but people forget when you sell your stock usually everyone else is selling as well. You have to think about who is on the other side. On the other side is usually market makers. They can set prices. They can keep taking bids or set ask prices.

When everyone was selling off value stocks my guess is that the other side was not being taken up by regular investors. If you read some of these old books from the 1920s they called it “putting up stocks.” In other words, there’s a way by which you can set the price.

That then stimulates demand. A rising price stimulates demand. I believe personally that people are going to get trapped in these stocks.

Ian: I would have to agree. The long term appeal of these stocks is not great. That’s why I don’t think demand is going to be sustained. Like you said, there’s higher demand at higher prices no matter what it is. Anything can have a bubble.

I am not saying the bank stocks are in a bubble, but higher demand at higher prices can go longer than you think. But long term I don’t think there is going to be any sustained demand. That demand is eventually going to come back in to America 2.0 stocks and that’s going to be a huge boost of these stocks that have been hit hard.

Paul: I will go a step further and say I would be a seller of those stocks at these prices. I like to say that for these stocks the destination is certain. This is my opinion and my judgment and not financial advice.

We are not financial advisors. You would need to speak to a financial advisor before you act on anything. But in my judgment, these things are for sure going to go into terminal decline at some point. The destination is certain, only the speed is unknown.

With that, we will close out the stock section and say we are BOP, but only on America 2.0 stocks, Fourth Industrial Revolution stocks.

Monthly Cannabis Use Has Doubled

I am going to reference an interesting chart on cannabis from a source called New Frontier Data. It lays out that monthly cannabis use has doubled since 2002 on average. It may not sound like a lot. It’s a 15% compound average growth over 17 years. In the past year cannabis frequency has gone up by 73%, in the past month by 98%.

monthly cannabis double 2020 infographic

The people reporting that their use has increased daily is more than 200%. Other stats that were interesting is that now there are more than 110.4 million in adult use states and 76 million people in medical states. Still, an amazing 70.4 million people where it’s illegal.

If you look at it, cannabis is still pretty low when you compare it to soft drinks, beer or tobacco. It’s just above coffee. It’s now surpassed spirits and wine. This thing is starting to roll along. Yet, they have nowhere near the market cap of any of those things.

Ian: I think last year revenue in the U.S. was in the low $20 billion. The tobacco and alcohol industries combined are in the trillions. So there’s so much more disruption left for cannabis. I think it’s only going to go up from here. It’s only been legal for a few years in most of these states.

A lot of them have just legalized in the past year to year-and-a-half. It takes time to get through all these regulations and to setup your operations, get them running and get them to capacity. We are still at the infancy stages of the cannabis industry. The U.S. is shaping up to be, by far, the largest cannabis market in the world.

I think the market caps really haven’t factored that in. Everybody saw what happened in 2017 to these stocks. They got annihilated. I think it scared everybody out. There’s still a lot of fear but there’s nothing to suggest these companies are going to go away or that they should be valued this low.

Paul: There’s actually a rally beginning in some of the bigger stocks in cannabis. That is unfolding right now. Have you been watching it? Is this the beginning of a run in cannabis?

Ian: It looks like they have bottomed out. I think that happened in March. The last couple of weeks I have noticed some of the bigger ones have bounced 30% or more. I do think it’s only a matter of time before they get to where they were before.

One of the main ones I watch is ETFMG Alternative Harvest ETF (NYSEArca: MJ). It’s a big ETF. It has a lot of the bigger cannabis stocks in it. I have a prediction for that. In 2021 I think it’s going to go above $40 a share.

We got a preview of that demand earlier this year when all the pot stocks spiked. It almost hit $40. So I think that $40 is conservative. It’s still almost a double from here. There’s still huge upside in these stocks.

Paul: In my stock roundup I saw both HEXO and Aphria in the most active list yesterday. It’s often an indicator that people are coming to buy the stocks and bid them up. We own Canopy Growth in Profits Unlimited. We are up, but I expect we can have much more significant gains.

We are BOP on cannabis. As you can see from the information we put up, more than half the country only has medical access or has no access. There is so much growth ahead. It’s crazy how early we are on this.

Ian: There’s an entire new market that’s going to take years to see the potential. That’s years of exponential growth for those markets. You still have the other half that has access but maybe not close to where they live or maybe there are a couple dispensaries and they are always sold out.

It’s going to be scaling for quite a while. The whole time it’s just going to be massive growth.

Paul: We are very early. We have no main primary brand that has established itself. We have yet to see established bars where people regularly go. I know we will get feedback from people who say this is terrible. However, based on our research, it’s definitely less terrible than cigarettes.

It seems equally less of that of alcohol and spirits as well. Please do not troll us. We have read up on this and we believe people are capable of using things in moderation. We think this is going to be a big industry. We are BOP on cannabis.

ETH to Reach $10,000?

Let’s talk about Ethereum (ETH). You sent this report to me and my reaction was like, “Whoa, wow. Whoa.” We’ll put this up. His name is Nikhil Shamanpant. He says,

“ETH the Triple Halving: How ETH Can Achieve $150,000 Per Coin by 2023 and a Plea for ETH Bulls to Dream Bigger Dreams.”

After reading this we had a back and forth on Slack that we can perhaps reprise on the IanCast. My reaction was that $150,000 by 2023 seems a bridge too far for me. However, I could see something like $10,000 or $15,000.

This really is becoming an economy — a digital cryptoconomy of its own. Today the currency by itself is making new highs. Its market cap is probably around $280 billion or something like that.

Ian: I think it’s around $300 billion right now.

Paul: Then you have Uniswap and Chainlink and all these other services that are built around it. It’s probably got a total market cap of what?

Ian: For the whole thing I would say probably $500 billion, if that.

Paul: It’s not a lot. There’s a lot of room for growth. What do you think of this?

Ian: I actually saw it on Twitter. Someone who I follow liked it or retweeted it. It caught my eye because it said, “I just finished this 79-page report on ETH.” And I click on it and it says “$150,000 by 2023.” Now I had to read some of it. That’s crazy — a good crazy, but out there from any prediction I had seen.

I do believe ETH will go much higher from where it is. I am not sure about $150,000 by 2023. It’s definitely getting to the point where I feel like it’s not going to take much longer before a lot of people start to consider it. It’s so much more efficient.

It’s less of a hassle to use than tradition finance with banking, lending and borrowing where you have to jump through hoops and contact a million people to get something done. Then you have to wait. With this, everything is instant. It’s much easier to use. Having used it myself, I can see why people like it.

It’s easier to access. Second of all, the fees are very high right now because so many people are starting to use it. They are working on scaling that within the next year or six months. When the fees go down, I think it will be a big boost. We are definitely seeing the future priced in here.

I think $300 billion is nothing compared to what it is going to be.

Paul: You estimated based on the number of coins outstanding that at $150,000 ETH would have a market cap of $15 trillion?

Ian: $18 trillion. The theory is that there’s a so-called infinite supply of ETH. But there are measures being taken to limit it to 120 million or somewhere around there. That would be $18 trillion at $150,000 per coin.

Paul: That’s large relative to the U.S. economy or even the world economy. I believe the world economy is in the $90 trillion or $100 trillion category. So that seems too big for today. However, then we started to chat and started thinking back 100 years when the U.S. was largely an agrarian economy.

The ideas of billions of dollars or even hundreds of millions of dollars in our economy was unthinkable.

Ian: When Apple hit $1 trillion in 2018, if you go back five years from that, people thought $1 trillion company was crazy.  It’s at $2.3 trillion now and that was the size of the entire GDP of America in 1978 or 1979 I think. In 43 years, that’s how far we have come.

Going from an entire economy being worth something to one company being worth something. I think that demand has been exponential and it’s going to keep being exponential for the foreseeable future, especially now that we are going completely digital with economies through crypto.

I think $18 trillion might sound crazy now but in five or ten years it definitely will not.

Paul: The first time the U.S. GDP hit $1 trillion was 1969. This may seem preposterous, but it’s definitely within the realm of the real given the fact we have barely scratched the surface of crypto at this point. There’s just the beginnings of the things crypto can create.

Who would have imagined that today we would have single-trillion-dollar companies created by the internet? How many of them? You counted them out.

Ian: There’s Apple, Amazon, Facebook and Google. Right now those are the trillion-dollar companies. Facebook is right on the edge. Tesla is close. There is going to be at least three or four times that within the next couple of years.

Paul: The way we were thinking about it is that in agrarian times they probably imagined billions being impossible. Then in the Industrial Revolution they probably imagined trillions being an impossible number. Then the digital revolution of computers and the first layer of software got us to $1 trillion.

We looked it up and the next level is quadrillion. That’s in all likelihood where we are going. I know people will think we are crazy. Nonetheless, we have more down-to-earth price targets for ETH. Give yours.

Ian: My price target is $8,000 for ETH within the next year.

Paul: Mine is more modest because we’re almost there. When I first put it out it was $4,000 for this year. We are nearly at $3,000. I might have to update my prediction for it. We are also getting near, but not close yet, to Ian’s crypto service launching.

There is a link if you would like to join the hot list. bitcoin to 100k 2021 image

Just like the videos we have been sending people on the hot list on how to use Coinbase. One was an article talking about the stock to flow (S2F) model that is by the Twitter handle @PlanB. A second article is talking about why we may be ready to a run to $100,000 somewhere in the near future.

Sign up for the hot list to keep informed about the crypto trading service and get some videos we have already done and potentially our discussion of BTC, S2F and some long-term price targets. Just to remind people, tell folks what your BTC prediction is.

Ian: I have two. The first one is $115,000 per coin by August. The second one is $350,000 per coin at the top of this bull market.

Tesla’s Quarterly Sales Controversy

Paul: Tesla reported their quarterly sales. As usual, controversy followed immediately after.

Ian: The company is still at all-time record performance. Their stock fell a little earnings but we already mentioned why that could be. They had record production, record deliveries for their cars, record revenue and, I believe, record profits. We don’t usually focus on that as much.

tesla quarterly earnings lose money news headline

Their auto business is in full swing. They are almost done with their factory in Berlin. They are working on their one in Texas. Something that caught my eye is that Elon Musk said he thought the Model Y will be the highest-selling car of any automobile in the world of its kind.

That was something I was definitely paying attention to. I think the goal will probably be to scale it even more than they have with the Model 3, which is hard to imagine because they have done so well with that. But I think the Model Y is going to be a huge winner for them.

Paul: This article from Car and Driver, of course the number one bullet was that Tesla sold a little BTC.  They cashed in $101 million in profit from BTC. This is, of course, what got all the headlines.

All the other stuff about the fact they delivered more vehicles in the first three months of 2021 than in any quarter before, the Model 3 was the bestselling premium sedan in the world and what you mentioned about the Model Y becoming the world’s bestselling car of any kind.

They were free cash flow positive in the quarter. I googled this and I found one article talking about this, but I found 30 talking about BTC profits. Only a couple talked about the record deliveries.

Ian: Of course. That’s how it is. All the sudden they value BTC because they don’t want Tesla to sell it. Tesla still has $2.5 billion of BTC, it’s not like they are selling out. Elon even said it was to test liquidity and it went well. It was a successful move for them. I am sure they will buy more BTC going forward.

Paul: I have read, I don’t know if it came from the company or not, that they wanted to show that BTC was liquid enough that they could use it if they wanted to. Seems like a plausible explanation to me. It was never intended to be a museum piece.

Ian: It’s somewhere for them to put cash they don’t need at the moment, but they want to make sure if they need the cash they can convert it back to fiat. It’s totally reasonable. They want to accept BTC as payment too, so it’s for that reason too.

Paul: They have plenty of cash. As you said, they are making headway on all the gigafactories. They will be able to do Tesla Semi and Cybertruck that’s still coming. They have solar roof and Powerwall. They have so much going on.

Cathie Wood has put a price target of $3,000. I believe that is going to come to pass sooner rather than later. I will give it a maximum of three years for that to unfold. I would say even in the next 12 to 18 months. What do you think?

Ian: I have thought about this too. I definitely think $3,000 is possible within the next few years. But I think by the end of this year Tesla will hit $1,500 a share.

That’s all we have for this week, take care!

Regards,

Ian Dyer

Ian Dyer

Editor, Rapid Profit Trader

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