Back in February, some technical indicators set off my Spidey senses.
I didn't have a crystal ball. Trust me, if I did, I would have opened up a lot more positions.
But at the time, I went short Huntington Bancshares Incorporated (HBAN), a regional bank, and the SPDR S&P Regional Banking ETF (KRE).
Of course, hindsight being what it is with this banking fiasco, it's worth repeating that luck favors the prepared trader.
If you were trading with me, you benefited from this movement too. However, we were far from the only people making money shorting the banks.
Not even close... Look at this headline:
Somehow that doesn't even tell the whole story...
78% of every stock shorted in the banking sector was profitable.
97% of every dollar shorted in the banking sector was profitable.
Suffice it to say, there was a lot to celebrate among the trading community from this banking crisis.
Let's take a look at my handy-dandy sector breakdown table to see how things have acted in the first quarter of 2023:
It comes as no surprise which ETFs round out the bottom of that list.
Now, here's the trade from all of this - or at least how it's worked out for the past couple of quarters.
It's a simple concept called a "reversion trade."
The analysts have been going out and basically buying up the stocks that have been beaten down over the last three months.
Last year, we saw the SPDR Series Trust SPDR S&P Homebuilders ETF (XHB) and SPDR Series Trust SPDR S&P Retail ETF (XRT) sitting at the bottom of that chart. As you can see, a couple of quarters later, they're in the green.
This market has truly turned into "let's just buy the bottom basements" because they know everyone else is going to buy the same stuff.
What this means is that for the next couple of weeks, everyone - myself included - will be looking at the KRE and KBE - but also the Select Sector SPDR Trust Financial (XLF).
That's partly because when you look at what the analysts are expecting for the upcoming earnings season, it doesn't appear they've been adjusted.
Last quarter we saw a -6.6% growth rate on the S&P 500 earnings. That's the lowest for a single quarter since Q2 2020.
Let that sink in for a second.
When we look at the guidance for this next quarter, 79 companies have reported negative guidance. You've got 27 that have put guidance out that is in line or better than expectations.
So, when you look at what we've got coming down the pike, we're looking at a roughly 3-to-1 ratio of unexpected bad news to good news.
This is a crucial period of time because we are in that run-up period before earnings - the calm before the storm, if you will.
Currently, the Chicago Board Options Exchange's CBOE Volatility Index (VIX) is sitting between the 18 and 19 levels.
If we roll into earning season with a sub-20 VIX, you may get some earnings responses that are favorable. You'll want to fade those.
Those will be traders who are high on hopium looking to capitalize on movements that don't make technical sense.
The more people try to act like everything is fine in this market, the more I get the feeling that everybody's just whistling past the graveyard with these expectations.
So I'm going to tread carefully and keep watching these developments as earnings season approaches.
There might be opportunities leading up to it. There will definitely be opportunities after it.
In a market that appears to be sleepwalking into such a critical period, the prepared trader can really reap some rewards once everyone wakes up.
If you want to make sure you're celebrating by the time everyone else arrives at the party, you need to be a part of my Night Trader service.
That's where I lay down my traps for the market to fall right into my hands.
I've got a feeling there's going to be a lot of that to come in the next few months.
The post Do not fall in line like a sheep before earnings appeared first on Penny Hawk.
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.