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How to trade an earnings “pop and drop”

Jan 13, 2022

Good morning!

The markets are nudging higher after a welcome 3-day winning streak. As much as I’d like to say we’re out of the woods, that’s not true. Every big company that produces great numbers this earnings season will introduce volatility now that JPoww is playing along.

Here’s my playbook.

1 – How to trade around an earnings “pop and drop”

The pattern has been the same for a while now … big leveraged traders run prices higher into great earnings then dump the stock. That catches a lot of investors by surprise who don’t understand why prices fall after good numbers.

Short answer … it has nothing to do with the numbers (posted) from great earnings and everything to do with separating you from your money.

Start thinking like a professional because that’s how you beat ‘em.

First, be in ahead of the fight and ahead of the run.

Second, set profit targets at levels that make sense to you or sell covered calls to lock in an exit and make a little extra money.

Third, use part of that money to pay for puts that are slightly lower than your targeted exit or current prices to protect against a potential downdraft.

This is a tactic called a profit collar BTW – and it’s ideally suited for earnings season volatility.

I’m planning to teach it as part of the One Bar Ahead™ curriculum later this year if that’s of interest. Meanwhile, here’s a quick primer. (Read).

2 – Imagine that … the world’s worst bank apparently lent billions Evergrande

China’s Minsheng Banking corporation was once viewed as the private lender who’d redefine China’s staid state-banking system. Only now it’s being crushed so badly, largely as a result of loans it made to China’s Evergrande Group, that it ranks dead last in the Bloomberg World Banks Index, a 155-member cohort. Short-sellers have made a killing as you might imagine. (Read)

The takeaway here is one most investors will miss.

Real estate is viewed as a popular investment but be super leery of any large bank that goes whole hog into property because it’s their version of kryptonite. Japanese banks did the same thing in the 80s and 90s. American S&L’s did this here over roughly the same time frame.

3 – Buy these stocks if you’re really worried about inflation

Well, duh! US inflation now rising at the fastest pace since 1982. (Read)

Beating the rise is not difficult if you know what to look for from an investing perspective. (Watch)

We’ve been talking about this for a while now and will continue to do so for a long time to come I imagine. Amazing how many people just can’t put down their mobile phones long enough to realize that they’re holding the key – literally.

4 – Content is more likely to bomb than be “the bomb”

Spotify’s user base has grown by 84% over the past few years but the number of podcasts has grown by 1,630% according to company data. Listeners suffer from over choice while producers are having trouble attracting listeners.

I’ve got to imagine the numbers are similar for Netflix and every other producer with an eye on original content as a revenue base for the simple reason that it’s increasingly common for consumers to spend a bit of time thumbing through Netflix suggestions or Amazon Prime, Hulu, Roku … then turn it off and walk away because they can’t find anything to watch. And people wonder why I’d rather own the House of Mouse??!!

Big brands with even bigger portfolios are defensible, to paraphrase Warren “the Big B” Buffett. If you know what to buy and why, awesome! If you’d like a little help, I’m here. (Learn More)

Meanwhile, putskies on Netflix ahead of earnings? Might be time….

5 – AFT: ban Congress from trading stocks

This is looooooonnnnng overdue. Many members of Congress seem to think getting rich at the expense of the citizens they ostensibly serve is okay. I think it’s gross and an abuse of power. (Read)

No word on “stock picking legends” like Kelly Loeffler (R-GA) and Richard Burr (R-NC) who reportedly sat in closed door briefings on the then-emerging Covid virus and allegedly used the information they learned to sell stocks before the public knew about the extent of situation and prior to the market falling out of bed.

Nancy Pelosi’s husband is also notably silent as well despite achieving “stock picker legend” status … a remark made dripping in sarcasm … and being tracked by several social media accounts that highlight his apparent prowess. Meanwhile, we’re supposed to believe that he is just that good.

My two cents is that every elected official, their spouses and all members of their immediate family should be required to put their investment assets into blind trusts the moment they assume office. Then, take it a step further … what you come in with, you leave with.

Or take it the other way. Make ‘em donate excess profits derived from insider information to the social security fund and make good on any losses they incur just like the citizens they serve.

Or perhaps, they’re restricted to the S&P500 so they have an incentive to grow the broader economy.

Reform is considerably overdue.