A friendly reminder about "broken clock" permabears...
Earnings season kicks off...
A big, volatile report in sight this week...
Here's two ways to trade it...
Seasonality standout trades to watch...
Keep your eyes peeled this afternoon for some words from Keith on a major tech breakthrough...
The stock market is no place for a pessimist...
If you spend any time with financial media (or if you're like me and might spend too much time), you've no doubt come across an archetype best known as a "permabear."
These are the folks who bliss-less-ly ignore the mountain of positive data at our fingertips and commit to pessimism.
They point to government debt... inflation data... or anomalies in unemployment numbers as evidence of an ever-approaching crash in the markets.
Understand, I'm not saying all this data is unimportant. It is, and that's why I cover it frequently in these pages.
But when it's paraded around as a signal of imminent doom, it gives me pause.
Why do they do this? Not because it's right. Because fear and negativity are the biggest drivers of the attention economy.
There's an old saying that goes "a broken clock is right twice a day." Permabears are broken clocks...except imagine the clock is announcing, with every failed attempt at a tick, that it'll be right sooner or later.
The truth is, investing is an optimistic act with overwhelmingly positive outcomes. Thus, you should take any doomsaying with a cup of salt.
When you invest in anything, you do it for one or two reasons (both can be true at once)...
For dividend payers: to earn a share of the company's profits as income.
For everything else: to earn a share of the company's growth through price appreciation.
Pessimism is plainly incompatible with the act of investing. Growth, profit, appreciation are all optimistic words the last time I checked.
Market crashes are called that for a reason. Like a car crash, it happens suddenly, and then it's over. It's also incredibly rare. About as rare as a clock stuck with all hands on 12 being right about the time.
And to cap this off, since you follow TradeSmith, you don't need to worry about a market crash anyway...
First off, it's worth noting that 100% of the S&P 500 sectors are in the Green Zone – a good sign that shouldn't need much unpacking:
Second is the fact that any TradeStops subscriber gets an alert when individual stocks, sectors, or broad market indices go into our Yellow Zone (a warning level) or the Red Zone (a true risk-off level).
And if you're not a TradeStops subscriber, don't worry. Major benchmarks going into the Red Zone are such a rare and significant event, we don't keep it to ourselves. Read our CEO Keith Kaplan's reasoning on that here.
Whenever these things aren't happening, you can confidently treat dips as buying opportunities and keep looking forward to the future.
October 21 could spark the stock market’s biggest day of the year, according to the man who predicted the 1987, dot-com and 2008 crashes. You have just days to prepare for a historic turning point in the market that could double your money – as he’s already shown 675 different times.
Earnings season is here, and one big volatile stock reports this week...
The third quarter just ended two weeks ago, which means we've now turned the page to the last earnings season of 2024. And this week, one stock caught my eye.
Video streaming leader Netflix (NFLX) reports tomorrow, Oct. 17 after the close. And I single this company out for its consistently and unusually large post-earnings price reactions.
Over the last three years, Netflix has had a positive post-earnings stock price reaction in five of those 12 quarters, with an average gain of 11.1%. That's a pretty huge move for a $306 billion company.
The negative reactions are even bigger, and more frequent. In those same three years, the other seven quarters saw negative price reactions, in which NFLX fell 11.6% on average. The worst quarters were the fourth quarter of 2021 and the first quarter of 2022, with back-to-back double-digit falls of -21.8% and -35.1%, respectively.
The point is, NFLX is a volatile earnings mover. And that makes it a great candidate for a straddle trade.
A straddle is an options strategy where you buy call and put options with the same strike price and the same expiration date on the same stock. You're essentially betting that the stock's going to move big, one way or the other, and you're setting yourself up to profit either way.
This can be a great strategy for earnings season, as it's often impossible to tell which direction a stock will go even if a report is positive. A company can tick all the boxes on numbers – but a retiring executive, lowered guidance, or the implications of some strategic decision can nuke the price anyway.
I dug through some historical data and looked at what an at-the-money straddle on NFLX would've returned for the last three years of earnings seasons, assuming you bought it right before the earnings report and sold it afterward.
Over 12 trades, only five of them lost money... with an average loss of -48%. Of the winning seven trades, the average gain was nearly 76%.
This tells me that NFLX is a great earnings straddle candidate to watch. More often than not, NFLX makes sharp moves post-earnings. And at times, that volatility can lead to outsized short-term returns.
Of course, there's more than one way to trade earnings season. Our friends at Derby City Insights, Andy and Landon Swan, use a secondary layer of data derived from a wide variety of social-media sources to give them an edge trading these specific times. Here's what they had to say in their trade alert for this week in their Earnings Season Pass advisory:
Netflix (NFLX), which reports Thursday, Oct. 17, has been enjoying increased consumer demand; web traffic is up more than 10% year over year and Consumer Happiness has held strong.
The company's ad-supported tier is attracting value-minded consumers, and cracking down on password sharing has led to stronger growth.
In addition, NFLX shares are at a three-year high with room to go higher. The stock slid on its last two quarterly earnings releases, which suggests it could be due for a bullish surprise this time around.
Seasonality is a complementary factor to earnings season...
Often here in TradeSmith Daily, we note the trend in seasonality for broad market indices throughout the year.
This year, for example, it's been bang-on for several volatility surges. Notice below how election-year seasonality predicted bumps in the VIX in April, August and September – and how stocks are also starting to follow the historical trend in October:
But we offer a lot more with our TradeSmith Seasonality tool. In fact, we track seasonal data on every asset in our system – including thousands of individual stocks.
Even better, we screen these stocks for the top seasonal opportunities, which Trade Cycles subscribers get right on their TradeSmith Finance dashboard:
This screener updates daily, showing the stocks with the best upcoming seasonal patterns. Ranked #1 today is PDF Solutions (PDFS), which has had a perfect track record of rising from Halloween through Christmas Day, with an average return of nearly 17%.
Another stock, Monolithic Power (MPWR), has a bullish seasonality period starting this weekend, on Oct. 19, and running through Dec. 3. During that window MPWR has gone up 100% of the time, with an average return of 13.4%.
And yes, it screens for bearish seasonality opportunities, too, if you're looking to take profits on stocks you hold or potentially trade these names to the downside. But in the spirit of how I opened today's daily, we'll save those for another day.
Trade Cycles members get unlimited access to this screener, not to mention seasonality data on every asset in our system. Check out a subscription here.
Quick note on this afternoon's programming...
A major piece of tech news dropped earlier this week, and it has significant implications for the broader investment landscape, but also a select, niche part of the technology sector.
Keith Kaplan will be writing to you about this development later this afternoon, along with a brand-new feature we're introducing to TradeSmith that's coming at just the right time. So don't miss his email coming later today.
To your health and wealth,
Michael Salvatore Editor, TradeSmith
Note from Ashley Cassell, Managing Editor, TradeSmith Daily:
Technology investors should also keep in mind that, when it comes to investing in AI, the "first generation" companies may no longer give you the bang for your buck that they used to.
Back in June, Louis Navellier of InvestorPlace shared a new way of playing the AI boom which has already shown massive gains. For example, he recommended an AI energy stock that more than doubled.
Yet even today, a lot of investors are getting into previous AI winners (too late)...or hiding out in cash or Treasury bonds.
Louis expects a major shift as soon as Oct. 21 – one that will make the likes of Nvidia an "old story," to quote the man himself. And this is coming from a $700 million money manager who's one of the original NVDA bulls from the early 2000s.
