Earnings Season Ahead
What to Look For and How to Play It!

by Ian Harvey

July 11, 2017

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Defining “Earnings Season”

“Earnings Season” is simply a period of time that lasts several weeks and occurs four times per year, during which the vast majority of U.S. corporations report their quarterly sales and earnings. Earnings season starts immediately following the quarter-ends of the year -- January, April, July and October.

Earnings and earnings season is extremely helpful to the trader because earnings announcements provide a background handle on whether companies are performing well in general and whether results are meeting, exceeding, or lagging analysts’ expectations; and provide an overall picture as to the health of the stock market.

Ramping Up

The earnings season begins this week and will kick into a much higher gear next week. There will plenty of opportunities provided for trading perspectives before and after earnings as further information becomes available.

The “Trump rally” provided for a strong Q1 earnings season; and now, some very favorable economic reports recently will help continue to drive stock prices up, yet again. Bear in mind that the market indexes are at an all-time high due to the extended bull rally; and the Q2 season occurs in the summer, where trading normally sees lower volume on earnings performance which may mute some price fluctuation when companies report earnings.

Even so, there is a strong market directly ahead, likely to be stoked by positive earnings results. While the second quarter estimate is lower, it still should be a strong quarter, and the 4th quarter in a row that shows positive earnings momentum.

The month of July generally tends to be positive for the S&P 500, and volatility tends to ramp-up; which is great for options traders.

Moving On

The earnings season is just kicking off, with only 24 companies (approximately 5% of the S&P500) having posted earnings so far; but, earnings results from companies such as Nike , Oracle and Darden have been exceptionally strong – a precursor of things to come!

Analysts are more optimistic than usual especially since, this time round; earnings estimates for the S&P 500 are only two percent lower than they were at the start of the quarter in April, which is well below the normal four percent.

The Q2 earnings season will be in full-swing next week, but prior to that major banks will be reporting on Friday; which represents a large percentage of the S&P 500 market capitalization.

This will serve as a speculation point in regard to the strength of the new earnings season.

Stay Bullish

It appears that bears may be in for a bad time looking at recent data as investors are gaining more confidence in the strength of the U.S. economy; a strong rise in new jobs during June, with the data marked by modest wage growth, the Fed late last month approving plans from the 34 largest US banks to use extra capital for stock buybacks, dividends and other purposes, GDP estimates up, ISM Manufacturing is highest since 2014, ISM Services and forward looking New Orders component looking pleasing.

The S&P 500 companies are expected to report 8% earnings growth on a 4.6% gain in revenues, which is a big reversal in comparison to a 2.1% profit decline in Q2 2016. This helps consolidate the fact that the S&P 500 profit growth of 4.3%, 8% and 15.3% in the last three quarters were not coincidental.

How to Play Earnings

Financials, including JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC), will launch the start of the earnings season this Friday, followed by the so called “FAANG” stocks —Facebook, Apple, Amazon, Netflix and Google —the following week; and early indications point to another strong season.

The S&P 500 is the most widely followed benchmark during earnings season; analysts keep tabs on estimates as well as reported numbers of all of the index’s components, and then collate the information to determine corporate earnings in the U.S.

There are several strategies to consider during earnings season:-

  • Buy before earnings results are presented; this begs the questions – will the earnings beat, miss or meet analysts’ estimates? – And how will the market react to the report?
  • Buy prior to earnings, and sell just before it is presented.
  • Wait until the company announces the report.
  • Use options – and if concerned about a stock price moving opposite to that which you favor, then execute a stop-loss to counter this movement.

Watch These Sectors

The energy, technology and financial sectors are expected to drive earnings growth in Q2.

The two largest sectors in the S&P 500, financials and technologies, should provide solid growth, with financials up 7.6% and technology 11.2%.

The recent pull-back in tech has provided a positive buying opportunity as the percentage of S&P 500 Technology stocks above their 200 DMA remains firmly above 80%.

As well, oil and gas companies’ earnings should reverse higher after an outright loss a year earlier.

Also, multinational companies should be doing particularly well in a global recovery.

Stocks to watch during the earnings season, that are expected to deliver 50% or higher EPS growth, are Nvidia (NVDA), Floor & Decor (FND) and Alibaba (BABA)-supported Chinese internet play Baozun (BZUN).

Other companies to consider are LG Display (LPL), Royal Caribbean Cruises (RL),                Applied Optoelectronics (AAOI),  MasTec (MTZ), Planet Fitness (PLNT),  Everest RE Group (RE), Blackstone Group (BX), MKS Instruments (MKSI), U.S. Concrete (USCR), Progressive    (PGR), National Beverage (FIZZ) and Teradyne (TER).

In Conclusion

The overall earnings season is likely to be a continuation of what occurred in the first quarter, where earnings for the S&P 500 grew by 15 percent.

Being prepared with strategies, watch-lists and a sound action plan will certainly help provide a profit during earnings season; whether you are playing the stock before earnings or waiting until a company delivers an earnings surprise and breaks out, you need to be alert and ready to make a move.

Earnings season presents unique opportunities for traders who know what to look for and how to take advantage. However, at times, an extra strategy or an added boost to your existing trading methods; or a full-blown strategy, is needed, therefore,  get on board with the members of Stock Options Made Easy.

The proven track record says it all!!

Best of Trading,
Ian Harvey
Director of Stock Options Made Easy


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