How to Play Amazon and Apple Earnings

We've seen some big moves on some of the biggest names in the S&P 500 over the past few days, and even at this point in the week, it's nowhere near over. A third of the S&P 500 has reported or will report this week.

In fact, it's not out of the question to think this could shape the direction of the market in the short term - and even a short-term direction couldn't hurt. At midday Wednesday, the S&P 500 and NASDAQ were heading up, and the Dow was down slightly.

We saw Tesla Inc. (NASDAQ: TSLA) sink after reporting record net income and revenue surges. Same deal with Microsoft Corp. (NASDAQ: MSFT); its shares are down as I write this at midday Wednesday.

In fact, and as we expected, the news has been overwhelmingly positive in the earnings department. Around 84% of companies that have already reported have produced positive earnings per share (EPS) surprises, and, as of Wednesday, 77% had beaten on revenue.

But unless you know how to play it, an earnings beat doesn't necessarily add up to instant, monster profits. I'll tell you why in a second, when I show you how to play what could be the biggest movers of all this week.

Here's Why Stocks Move Like They Do After Earnings

Take companies like Microsoft or Tesla - quality companies with objectively positive earnings news. Why did they sink immediately after? Why do some other stocks go up after positive news?

It's an old story: Traders are just selling the news. They rode the stocks up ahead of earnings and cashed out when they felt like the short-term profits were as high as they could get.

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But also, you've got a big class of very savvy traders who are trading the big spikes in implied volatility (IV), which, as you can see here, are really just spikes in demand for options. My colleague, Tom Gentile, has a lot more on that - these surges can potentially be very profitable events if played correctly.

That's why options trading in and around earnings season can, unless you time it perfectly, end up being an expensive mistake - even if you're actually right and think you're well-positioned for the ultimate direction of the stock.

Then again, sometimes a positive earnings report... takes the stock higher. That makes more sense fundamentally, and it's also simple: Traders and investors figure out, based on earnings, whether a stock is worth the price. If they figure it's cheap, they'll buy and send the stock higher.

With this in mind, let's look at some of the big ones

How to Play These Two Big Stocks

Apple Inc. (NASDAQ: AAPL) hasn't reported yet, but likely will by the time you read this on Thursday morning. The company's got a big 2020 performance to outdo this year, and most of the forecasts I've seen predict beats - big ones - on all kinds of metrics. Barron's gave Apple a vote of confidence saying earnings would "blow past expectations."

I don't see any reason to doubt them, given the recovery underway in the broader economy.

If you take a look at the chart above, you'll see the relative strength index, the one technical indicator you can use to tell you how the trend is likely to play out. If the RSI is moving higher, toward 70, the stock is in "overbought" territory and could soon sell off. If it's closer to 30, it's "oversold" and possibly ready to take off.

The midday reading of just over 58 seems to be closer to overbought, but the RSI has fallen over the past several sessions - it's becoming oversold.

That and the fact that Apple still hasn't reclaimed the highs it saw in January tell me AAPL shares are a buy here, no matter what traders do with the earnings reports; I'm excited to see what could happen, but whatever does, pick up some shares - pick up more if it falls in today's trading. If you've got some speculative capital to use, consider going long on AAPL with some calls or, maybe more aggressively, selling puts. With that strategy, it's possible to get into Apple at an even better price, but just be sure of your risk tolerance. Inc. (NASDAQ: AMZN) reports after the market closes Thursday, and - surprise - Barron's is pretty optimistic it'll beat expectations.

Again, I agree - there's no reason to believe Amazon won't blow the doors off Thursday evening when it reports first-quarter earnings. Analysts are expecting the company to take a $2 billion hit for costs related to mitigating the pandemic at its facilities, but upper estimates of revenue are coming in at something like $106 billion, more than enough to offset pandemic expenses.

That said, my thinking about this stock couldn't be more different from Apple.

I'm giving the stock a miss at this $3,470 level. Its RSI is about as high as you can get without being completely overbought, and it's tough to imagine a glowing earnings report would have traders suddenly sit up and think about some kind of hidden value here. I'm looking for its bullish trend to reverse over the next few days, and I probably won't look at building or adding to any AMZN position until it falls below $3,400 or even $3,350 - I'll be in touch if I see that happen. If you've got an Amazon position already, a protective put could be in order, which should ease any losses you might see in the share price.

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