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...
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Microchip Technology Inc. (NASDAQ: MCHP)
Announcing Feb. 4, Microchip shares are seeing some weakness this week ahead of the company's report. The recent selling plunged the stock toward its 50-day moving average, where it has found support.
Unlike Apple, Microchip is among the lesser crowded trades, despite the fact that the semiconductor sector has been one of the hotter groups of stocks.
There are additional signs that expectations for an average earnings report are expected by traders, which means that the stock is more likely to have an explosive move higher on anything better than expected.
Boot Barn Holdings Inc. (NYSE: BOOT)
The retail sector has been providing a lot of positive results during this earnings season as the average rally for retail stocks that have reported over the last two weeks sits around 14%.
Boot Barn has been a quarterly mover as the specialty retailer has had relatively low expectations from analysts. This quarter is no different as we've not seen Wall Street walk up its earnings expectations for this quarter.
As a result, the stock is poised to make a surge higher on any earnings results that are in line or better than expectations.
Like Microchip, we've seen the stock dip lower ahead of next Tuesday's (Feb. 4) earnings report. The move puts BOOT shares in a position to rally back to their highs, a 15% rally higher!
Clorox Co. (NYSE: CLX)
We just closed a profitable position in the Night Trader portfolio on Clorox after the stock rallied about 12% since the beginning of December. Our exit was timely as shares recently pulled back 4% to their current price of $155.
The run is still in its early stages as Clorox is preparing for another stage of the rally that is likely to be kicked off with a positive earnings report Tuesday morning.
Technically, the trend remains strong for Clorox, as the stock is completing a Golden Cross pattern while the stock's 50-day moving average is crossing above its 200-day trend line. These patterns signal growing momentum as investors continue to drive Clorox shares higher.
A positive earnings report combined with the bullish trend will help to push Clorox shares to new high territory again.
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