This week, we're going to see hundreds of companies announce their quarterly results. From the reaction of the market so far, you would hope that the season would conclude as quickly as possible.
Look at Apple Inc. (NYSE: AAPL). The company throws out a stunning earnings report last night after the close. The result – shares are trading 2% higher this morning. Shouldn't the stock be trading 10% higher like Intel Corp. (NASDAQ: INTC) was last week? Let's look at "why" the shares are seeing a muted return.
Apple shares are among one of the most recommended stocks on Wall Street and have seen a stark increase in expectations. Historically, this is a sign that we're likely to see a rebalance from the stock into other peer companies. That "rebalance" will result in additional selling pressure on the shares, especially if we hit a soft patch in the market as the seasonal calendar and my indicators suggest.
One the other side of the coin, Advanced Micro Devices Inc. (NASDAQ: AMD) dropped a lackluster report on the table, and the stock is trading 8% lower today. A more fitting response for sure. The tale of these two stocks is a signal of what's to come for the next few weeks: small rewards for great earnings and large punishments for those stocks that miss their marks.
Why are we seeing things play out this way? Simple: This market is too crowded with bullish investors. Put simply, everyone has been buying Apple for the last three months, so when the company comes out with a good report, there just aren't that many investors left to push the stock higher.
Look back at AMD, another stock that everyone has been buying along with the other semiconductor stocks. Miss your number – because the stock is crowded with bulls – and you get punished simply due to the fact that the "crowd" that has been overbuying the stock is now suddenly selling.
The story of the season is the "crowded trade," and it's a story that investors should be avoiding.
So far, the over-loved and -hyped sectors of the market are delivering on their earnings results, but they're failing to follow through on performance as sectors like technology and financials have been bid higher ahead of the earnings season.
For now, these sectors should be avoided for new investments, and instead a few of the "under the table" sectors should be considered for new allocations. These include healthcare equipment, retail, and software.
With that in mind, let's take a look at a few of the stocks I'm looking at ahead of their earnings.
The next week of earnings reports will focus on the healthcare, software, and industrial stocks, which is providing a target-rich environment for trades. Let's take a look at three companies at the top of my bullish trade list…
The 3 Best Stocks to Buy Before Earnings Season
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Strikepoint Trader and contributes to Money Morning as the Quant Analysis Specialist.