It’s earnings week… are you prepared to act?

From the Stansberry NewsWire team:

Earnings season is different. It’s what makes the Wall Street investing community great and horrible, all at once. One quarter can be the penthouse while the next can be the outhouse. No two quarters are ever the same. But one thing that’s consistent is hedge-fund managers studying the reports for trends.

Typically, it takes the first two to three weeks of a quarter for a trend to appear. And with 179 of the S&P 500, and 12 of 30 Dow companies reporting this week, all eyes are on the market. Once the fund managers and traders spot a trend, it’ll set the tone for the rest of earnings season.

This is also the peak week of earnings this quarter. Forty-two percent of the S&P’s market capitalization is reporting.

So, what is the trend so far? According to FactSet, of the 17% of S&P 500 companies that have reported first-quarter results, 80% have reported surprisingly positive earnings per share (EPS) numbers, and 72% have surprised with positive sales. The historical average for companies beating earnings is 64% according to Reuters. Upside is the trend… but stocks have barely reacted. So far, companies that beat expectations aren’t really going up, and companies that miss them aren’t really going down.

FactSet also noted that the blended first-quarter net profit margin for the S&P 500 so far is 11.1%. That would be the highest net profit margin for the S&P 500 since FactSet began tracking these data in the third quarter of 2008. Analysts anticipate net profit margins to continue growing throughout the year. This should be a positive move for the market, but it’s still early. Let’s see if this trend can hold or accelerate. Unfortunately, there isn’t a lot of historical data to indicate future results.

Tech stalwarts Alphabet (reporting on April 23), Facebook (April 25), and Amazon (April 26 will be a big “tell” for the market. In addition, other important names to watch will be Twitter (April 25) and “the Google of China,” Baidu (April 26).

If they report good earnings and give decent guidance, the market could be ripe for a squeeze higher. Here are a few reasons why:

  1. Based on the recent Bank of America Fund Manager Survey, cash holdings are at 5%. Since most fund charters state that managers can’t hold more than 5% in cash for an extended period, the number tells us that they are at maximum cash. The worst thing that could happen is a market move higher as this cash is unloaded.
  1. Last week, investors poured $393 million – the most money in five years – into an exchange-traded fund that rises with volatility. In addition, Commitment of Traders data indicate money managers hold near-record long positions in volatility futures. Again, the worst outcome would be a market move higher.
  1. Commodity trading advisors (CTAs) have minimal risk exposure to the market. Reports indicate that their quantitative models support reducing exposure to minimal levels invested in equities. Some estimates currently place that exposure at 40% to 50%. At the end of last year, some CTAs had levered up to as much as 130% exposure. In other words, there is plenty of room to add exposure. Confirming this point, the Bank of America Fund Manager Survey showed equity allocations were at an 18-month low. Some estimates state that an S&P close above 2,720 could trigger CTAs to buy an additional $14 billion worth of S&P futures. And yet again, the worst case here would be a move higher due to a lack of exposure.

 There are many momentum catalysts that could play out this week, but these are the indicators we’ll be watching for near-term market direction. And if earnings are horrible, all bets are off. Based on recent price action, we think investors are well-hedged for a move lower. That makes our contrarian side perk up.

The bears will continue to argue inflation is on the rise. They’ll say the Fed is going to have to raise rates at a quicker pace to combat inflation. If they listened to the Fed’s governors, the bears would know the Fed sees no need for hikes beyond the current pace – three rate hikes this year.

As more earnings are announced, it won’t be long before a trend is confirmed. Once it’s set, whether up or down, we should all be prepared to act.

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