What Happens When Earnings Season Ends?

Dear SlingShot Trader Subscriber,

This morning’s volatility is the perfect opportunity to talk about why stocks haven’t been acting more like this all along. Nothing is really new coming out of Europe, but traders have been distracted recently. The bad news (at least potentially) is that the distraction is starting to fade in the next two weeks, and unless Europe can get its collective act together, we might be in for another pullback to support on the major stock indexes.

The big surprise this quarter has been earnings season. The bottom line has been bigger than expectations. We actually get a lot of questions about this topic. Who provides “expectations” anyway? How do we know whether earnings were above or below this hazy number? Are expectations a good predictor for future price action, or are they just random?

Most of the time when “expectations” are referred to in the press, it’s the average expectations of analysts who cover the stock and publish reports for public or private investors. That’s useful to a certain extent, but whether a stock misses or beats those expectations doesn’t have a very predictable short-term effect on the stock.

“Expectations” also refers to the expectations of the “average investor.” However, as you can imagine, the average investor doesn’t really exist, can’t be polled and doesn’t issue reports. Although we don’t know what the average expectation is before the report, we can see its impact on prices following the announcement. Average expectations are like the “dark matter” of the stock market: We don’t know how to measure it, but it clearly has an effect on prices.

It’s safe to assume that if a stock begins to trend up following an earnings report, then the company has exceeded expectations — and the reverse also is true. Basically, we’re saying that money flows (up or down) are a direct reflection of expectations, and in that respect, this earnings season clearly has been above expectations.

For example, the nearly 900 large, marginable stocks that reported earnings last week are outperforming the S&P 500 by almost 100%. This is a strong indication that not only have actual profits exceeded expectations, but also that forward-looking statements from management have been good. Forecasts for the future from management often can have a much larger effect on stocks following a report than actual financial performance.

Without this extraordinary season, there’s little doubt that the markets would have been under very heavy selling pressure before today. The crisis in Europe continues to push yields in Italy toward default, Chinese growth is slowing, and unemployment and real estate prices are still stuck in the United States. Without earnings, the whole picture is still sour.


So What’s the Catch?

The problem is that earnings season is ending soon. Investor sentiment can be very fickle, and if Europe can’t find at least a temporary solution, then corporate profits won’t be able to distract investors from very serious problems through the end of the year. Expectations (there’s that word again) for growth can do a lot of good for markets, but not if yields remain at these levels and sovereign debt in the eurozone defaults.

You can see in the chart below how the month after earnings reports are released hasn’t been a good one for the market throughout the last year. In February (A), the bull trend ended as the Egyptian riots distracted traders and shipping was endangered. In May (B), the S&P 500 formed the “head” of the future head-and-shoulders pattern following news of a worsening Greek debt crisis and riots. August prices (C) broke the head-and-shoulders neckline following a downgrade to U.S. debt, Washington budget deadlock and spiking European yields. What November (D) will bring is uncertain, but it seems that caution is needed.

S&P 500 ETF (SPY): Chart courtesy of Metastock


Think about the news that dominated these key months in the past year. In each case, these were external economic issues that were driving prices. These issues dominated because stock-specific news gets quiet during the quarterly “off-season.” This isn’t a guarantee that November will be a disaster. After all, trends end eventually. However, it’s one of the reasons we’re still relatively balanced in our outlook and staying very flexible.


This Week’s Events

With earnings season still underway for another week or two, the schedule is still busy. Economic news is a little lighter this week, but there’s a round of key reports in the retail sector that may create trading opportunities in the short term. The list below covers most of what we’re watching as potential trend-changers/makers. We’ll discuss some of these in tonight’s webinar live at 6 p.m. ET.

11/9 – Cisco (CSCO) quarterly earnings report — after market close

11/10 – U.S. trade balance report — 8:30 a.m. ET

11/10 – Disney (DIS) quarterly earnings report — after market close

11/11 – U.S. consumer sentiment — 9:55 a.m. ET

11/14 – J.C. Penney (JCP) quarterly earnings report — before market open

11/15 – Walmart (WMT) quarterly earnings report — before market open

11/15 – U.S. core retail sales — 8:30 a.m. ET

11/16 – Target (TGT) quarterly earnings report — before market open


The Bottom Line for Next Week

We expect the status quo to continue this coming week. The trend so far is looking iffy, but it’s not as bad as we might have “expected” a month ago. This is nice, but volatility is high, and wide price swings are expected. This is actually good for us: Trading can be streaky, and winning trades in a volatile market tend to be very large.

As we have discussed in the last two weekly updates and webinars, that streakiness is difficult for new traders, but it actually can work in our favor. We don’t know when the streaks will occur, but having a good one in a nutty market like this can turn into big profits.



When it’s time to open or close a trade, we’ll send you alerts via email. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolio here. You also can see more trade-specific details by clicking on the trade links below.


Positions Opened

These are the SlingShot Trader positions we opened during the past week of trading that we haven’t closed yet.

Cisco (CSCO) On Nov. 7, we recommended you “buy to open” the CSCO Dec 18 Calls (CSCO111217C00018000) for $1 or less. We opened the trade for 92 cents. We still like it for new entries up to our limit price.

J.C. Penney (JCP) On Nov. 8, we recommended you “buy to open” the JCP Dec 36 Calls (JCP111217C00036000) for $1 or less. We opened the trade for 90 cents. We still like it for new entries up to our limit price.


Positions Closed

These are the SlingShot Trader positions we closed during the past week of trading.

Manpower (MAN) On Nov. 7, we recommended you “sell to close” the MAN Dec 40 Puts (MAN111217P00040000) at market. This trade resulted in a small profit.

Caremark (CVS) On Nov. 3, we recommended you “sell to close” the CVS Dec 35 Puts (CVS111217P00035000) at market for a loss.


Top Trades Now

These are the current SlingShot Trader positions that we still recommend getting into now, assuming you haven’t already bought a full position.

Cisco (CSCO) See Positions Opened above.

J.C. Penney (JCP) — See Positions Opened above.


Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday at 6 p.m. ET, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.

And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at johnandwade@slingshot-trader.com. (Please send any questions about the status of your subscription directly to Customer Service at service@slingshot-trader.com.)

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.



John Jagerson and Wade Hansen
SlingShot Trader