Selling the News is Getting Old

I can’t wait for this evening.  I actually enjoy watching election results roll in, and I look forward to the biennial ritual of flipping channels to watch data nerds stand in front of maps of congressional districts to breathlessly share granular polling data.  But I also look forward to tomorrow, when my inbox stops groaning from campaign solicitations and televised sports events run ads for beer, not candidates.  In the meantime, we will discuss an important post-earnings trading pattern.

Yesterday proved to be a highly disappointing day for optimists.  The title of our morning-written piece, “A Busy Week Starts with a Bounce,” must have looked quite foolish to those who read it later that afternoon.  Stocks got off to a promising start, spurred by sharply lower oil futures and some reflexive dip buying, but they quickly got ahead of themselves.  A mid-morning pullback from some overextended highs turned into a test of Friday’s lows.  The Nasdaq 100 (NDX) closed in “correction territory,” more than 10% below its record level set less than a month ago. 

Today seems a bit more promising.  Oil futures are holding onto slight declines, and the subdued bargain hunting in stocks seems to have a bit more staying power.   One trend that remains in place, unfortunately, is the tendency for traders to show disappointment with popular tech companies that report solid earnings. 

We saw it after the close when Palantir (PLTR) and Apple (AAPL) initially traded sideways after earnings beats, then sank as investors found something to dislike during their conference calls.  Something similar occurred this morning with Shopify (SHOP) after it reported solid results.  

2 Days, AAPL (blue, right scale), PLTR (white, left scale), SHOP (purple, left)

Source: Interactive Brokers

Yet there is something encouraging here: as of now, all three are trading well off their lows, even if they are all below yesterday’s closes.  We saw something similar in the market’s response to Amazon’s (AMZN) earnings last week.  That stock also sold off after earnings but recovered, and it is holding up well even as tech stocks sold off in subsequent days.

Contrast this with the more substantial selloffs in Alphabet (GOOGL, GOOG) and Intel (INTC) that occurred last week.  Both of those selloffs were far more substantive because the companies meaningfully missed key expectations.  GOOGL fell short of analysts’ expectations for EPS, revenues, and cash flow; INTC offered dismal guidance that was far below consensus.  Those stocks have continued to sag, despite some traders’ attempts to find tradeable bounces.

6 Days, GOOGL (white, right scale), AMZN (purple, right), INTC (white, left)

Source: Interactive Brokers

Given that traders are showing a propensity to sell key tech stocks after they report, hopeful dip-buyers need a meaningfully different approach to post-earnings selloffs. 

If the news is legitimately bad, be patient.  A stock that is getting hit because of a legitimate shortfall in a key valuation metric will take some time to recover. 

Remember, traders react while investors consider.  Institutional investors are likely to reallocate major positions over the course of several days as their internal analysts and portfolio managers reevaluate their models, particularly if they are already fully- or overweighted against their benchmarks.  It will likely take time to build a bottom.  Aggressive traders might see an opportunity to buy an oversold stock, but those conditions can and often do persist for days or even weeks.

On the other hand, if a stock is getting hit even though the report is otherwise favorable, then there may be a more tangible opportunity for a quick reversal.  Finding the correct entry point still requires some finesse, but the odds of a short-term bounce seem more favorable.  Market conditions need to cooperate, though.