So we actually went “over” the fiscal cliff, hiked taxes on Americans and began making automatic budget cuts via the sequestration.
Despite all those negatives, stocks have managed to add almost 11% year to date, even after the recent selling pressures. Why? Because there is not only value in many stocks, but an underlying hope (bullishness) that the U.S. is still the best place for global investors looking for a place to park their hard-earned dollars.
Where is Sentiment Now?
There are 14 stages of investor sentiment. These variations can be fairly easy to spot at times and illusive at others. Stocks often trend depending upon the psyche of investors, not always on hard fundamental data.
Interestingly enough, there is clarity amidst the chaos. As we entered the New Year, markets were cautious, but stocks still managed to charge forward.
“Hope” was the best way to describe the marketplace back in January, which was fairly close to the point of maximum profitability in the market’s emotional cycle (see the chart below).
If we take a look back to mid September 2012, markets were completely euphoric running up to the elections, with the fiscal cliff just a twinkle in the eye of only the savviest investors. After the election results and woes about the cliff and future of the economy, the market quickly gave back 9%, changing the mood from elation to outright depression.
Over the last six months, we have watched market sentiment go from a state of panic to complete turnaround. In fact, if you look at a daily chart of the S&P 500 over the past 3 months, you can see these emotions play out in stock prices.
Now, after another run up, we find ourselves between the “optimism” and “thrill” area, which still leaves some upside. But the easy money has been made.
While emotions can rule the markets much of the time, there are 4 times a year when companies report their results (earnings) and the objective overtakes the subjective. If the subjective mood is not “overly euphoric” than stable objective data should cause stocks to rise; this works in the opposite direction as well of course.
The good news is that markets are NOT euphoric or even overly optimistic when it comes to MOST earnings expectations, BUT you must be able to identify those stocks that have built up such a high expectation that it may be impossible to deliver.
MORE . . .
Some 900 companies will report earnings in the next few days. Meanwhile, a Zacks whisper breakthrough is targeting a handful of positive surprises before reports are released. These predictions are made with previously unthinkable accuracy.
Imagine buying a stock a couple days ahead of its report and then selling after its price “pops”. Important: This strategy is in high demand and closes to new investors Saturday, April 20.
Resiliency in Earnings
I’d be lying to you if I said that corporate revenues are shooting up and that the average company is making money hand over fist. But I can say that there are three things I feel very good about in the first half of 2013:
1) Corporations are lean and mean – The average American company has cut costs and economized their businesses to keep margins high and operate in a low growth environment.
2) Hoards of cash – We are seeing many companies stockpiling cash and equivalents, preparing themselves not just for the worst, but for the turn. The turn being an improvement in the economy when that cash is utilized for expansion, M&A, share buybacks and dividends.
3) Expectations are low – As I mentioned last quarter, expectations were relatively low; but more recently the average share price and growth estimates have come down even further. This makes the reaction to a positive surprise that much more significant. Even though Q4 earnings weren’t the strongest we have seen in years, stability and moderate growth were enough, in the right stocks, to propel them higher. The pickins will be a little slimmer here in Q1.
These factors will help support the markets throughout the coming earnings season, as long as revenues do not fail miserably.
How Do You Trade Q1 Earnings?
Expectations are low for a reason; I wouldn’t expect the overall market to see as good a return in FY2013 as we saw in FY2012. There will be “headline risk” associated with Europe, China and potential for a downgrade or default here in the U.S., which will also keep volatility elevated.
This means that you have to be laser-focused and step outside the box to find alternative investment methods to get superior returns. Defensive stocks won’t cut it and neither will stocks with low multiples (just ask some of the banks that are getting battered this season already).
I specifically target and study analysts’ behaviors and actions ahead of a report to sniff out those companies most likely to beat earnings expectations. I compound that data with relative valuation and sector favorability to find high stocks with a high chance of not only beating estimates, but moving higher on that news.
The perfect way to add this type of diversity to your portfolio is to target companies likely to beat analysts’ estimates and keep the trades short in duration, so you won’t be over-exposed to a market that is still susceptible to headlines.
The bottom line is that we will still have companies that perform extraordinarily well and top analyst expectations this coming earnings season. These companies will see their share prices break away (positively) from the market, which will most likely be volatile to negative as traders figure their next steps.
The “shotgun investing approach” will NOT work this season as I believe the big winners will be few and hard to target with a still doubtful market. Whatever method you choose, be sure to allocate your assets appropriately, reduce risk where needed and take or protect profits once you have them.
Listen to the Right Whispers
I am directing a Whisper Trader service that uses Zacks research data to predict positive earnings surprises before they’re reported. It has greater than 82% accuracy in selecting companies that beat estimates. Although these “surprise” stocks don’t all turn out to be winners, listening to selected whispers obviously can give investors a substantial advantage.
If you would like my specific stock recommendations, they are now available in the Zacks Whisper Trader, which is open to new investors until this weekend.
Happy Trading (and don’t forget to hedge),
Jared A. Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He directs the Zacks Whisper Trader which has an uncanny record for accurately predicting robust earnings before companies report.