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HELLO DARKNESS, MY OLD FRIEND – IS EARNINGS SEASON OVER ALREADY?

By Chris Johnson, Quantitative Specialist, Money Morning • February 5, 2024

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Chris Johnson

Eli Lilly (LLY)

PepsiCo (PEP)

McDonald's (MCD)

Linde PLC (LIN)

Disney (DIS)

That’s the top of the batting lineup for earnings season this week. A Who’s Who
of the market it really isn’t, which is my point.

This week marks the first really boring week for the earnings season, and if
there’s one thing I know, it’s that the market doesn’t like boring.

No, earnings season works because of the hype. Turn the TV on or open up the
trading app to the earnings reports rolling on from Microsoft (MSFT), Apple
(AAPL), Meta (META), and all of the cool companies… now that’s exciting.

It creates a buzz, and that creates that wonderful fear of missing out (FOMO)
feeling that gets everyone hitting the “buy” button.

This week, you’re going to hear about how many more burgers are being sold along
with the trial results for the latest hearing loss and alopecia therapies and
how Medicare will be negotiating drug prices.

Actually, that last one has some broad impact on the pharma companies, but not
the kind that the bulls will like.

Here’s a stat for you.

Over the last five years, Eli Lilly’s stock averaged a move of 0.1% over the two
weeks following its earnings report.

When it wins, the stock only moves 2.1%.

To put that into perspective, META just moved 20% the day after its report last
week. Most of the companies we looked at last week moved +- 8-10% following
their reports.

What I am trying to point out is that the market just lost one of its best
catalysts: excitement.

And with stocks trading at their highs, sentiment hanging around at “Greedy”
levels, and market momentum eroding, we’re set up for that healthy correction
that we’ve been talking about the last two weeks.

Here’s what to expect.

The deafening silence of dull earnings reports will suck the excitement out of
this market. That means sellers will start trimming their positions that ran
through the roof last week. We’re already seeing it this morning as Meta was
trading 1% lower ahead of the open, Amazon too.

You’ll see the Russell 2000 drop below $190, which will be the signal that
things are going to be a little bumpy for the next week or two.

But that’s okay. There are two exchange-traded funds (ETFs) that you can buy
this morning if you want to make a little money on this 5-10% correction.


THE PROSHARES SHORT RUSSELL 2000 (RWM)

This is what we call an inverse ETF. The ETF is designed to go up 1% for every
1% the Russell 2000 Index drops. In doing that, it offers a simple way to hedge
the market.

My target for the IWM is $180. That means that if you buy the RWM this morning
and the IWM drops to my target, you will profit roughly 7.5% on each dollar that
you invest in the RWM shares.  My target price to sell the RWM is $23.50.



(Click to enlarge)


PROSHARES ULTRASHORT FINANCIALS (SKF)

The next inverse ETF is more aggressive for the traders out there. The ProShares
UltraShort Financials (SKF) is an ETF that trades opposite of the regional bank
sector… with a twist.

Note the term “Ultra” in the name, that indicates that the SKF moves faster than
other inverse ETFs.

The SKF shares move approximately +2% for every -1% movement in the regional
bank sector. So, if the regional bank stocks drop 5%, the SKF shares will
increase 10%.

Regional banks are being hit harder by the Fed’s talk of holding off on interest
rate cuts, which is why I am more aggressively trading the sector weakness.

The regional bank ETF broke through its key 50-day moving average, and my target
has them trading with the potential for a 10% drop in the next two to three
weeks.

That means a purchase of the SKF shares this morning at $14 has the potential to
rally to $17 over the same period. That generates profit potential of 23% for my
portfolio as a hedge against this boring market.



(Click to enlarge)


BOTTOM LINE

We’re going to see stocks pullback, period.

At minimum, it’s a good time to lock in some profits and look for opportunities
to buy some of these barnburner stocks at lower prices. That opportunity will
happen in the next few weeks, be prepared with me.

If you’re a little more aggressive and are looking for a way to hedge your
portfolio, check out the RWM and SKF shares. Both give investors an easy way to
trade the markets.

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Chris Johnson

About the Author

Browse Chris's articles |

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.

… Read full bio




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