I love this time of year. I mean it!
The first day of the first earnings season of the year is magical.
It’s also one of the most predictable, as the Big Banks almost always determine the direction that the market will trade for the next three weeks, all in the first two days.
This time around it doesn’t look good.
That may create a larger problem for the market. Here’s why.
The bank stocks tend to follow one of the oldest patterns around when it comes to earnings… “buy the rumor, sell the news.”
What that means is that investors and traders bid the bank stock prices higher in the five to ten days ahead of earnings as they get excited about the banks dropping great numbers on the Street’s doorstep.
Their expectations go through the roof.
The problem with high expectations is that the bank stocks then must outperform to impress.
That’s not happening this morning:
- JPMorgan said quarterly earnings slipped 15% to $9.31 billion, or $3.04 per share, from a year earlier.
- Bank of America shares lost 4% this morning after reporting lower fourth-quarter profit.
- Wells Fargo forecasts lower income for 2024.
These are just a few of the highlights from this morning’s reports, but you can tell that the results are far from “outperforming” Wall Street’s expectations.
So, here’s what you should expect.
We’ll get another round of Big Bank earnings early next week. These will finish setting the tone for the earnings season trend.
Right now, the trend is leaning towards “sell the news,” which means we’ll get that 5-10% drop I’ve been expecting in the S&P 500 and Nasdaq 100.
Bottom Line – Here’s How You Trade It
Investors will just want to take a little cash out of the market to avoid this 5-10% pullback. Use stops or just put the orders in, but remember that it’s never bad to take profits. Put that money back to work in a few weeks when the market has pulled back.
More aggressive traders may choose to “trade” the weakness by using an inverse ETF (like the Proshares Short S&P500 (SH)) or options. Make sure that you are educated in how to use these investment vehicles. The benefit is that you can leverage the 5-10% drop to return 10-20% profits.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.