By: Bill Spencer — October 12, 2020
Small-Cap Monday - It's Earnings Time: Here Are 2 Ways to Profit
Happy Columbus Day.
If you happen to not celebrate this particular holiday...
Then Happy Monday!
Last Monday, President Donald Trump returned to work, COVID-free.
Politics aside, it's great to see Trump (or anyone) shrug off coronavirus.
And on Wednesday, Fed Chairman Jerome Powell committed to holding interest rates at zero for at least the next three years.
I have an opinion about this particular policy, which I won't share. That's because my opinion counts for what you might call "doodley squat".
I mean, there's only one opinion that counts for anything in the markets.
And that's the opinion of "Mr. Market" himself. And he seems to like what he sees.
That's fine with us. Because when Mr. Market is happy, we're happy.
Last week also marked the start of earnings season. Today, we're going to look at two ways to potentially profit off of earnings.
We'll look at a bullish play and a bearish one.
(Click any image to enlarge)
Every major index posted handsome gains last week. And for the second week in a row, small-cap stocks led the way.
The Russell 2000 and the S&P 600 (our small-cap proxies) gained +6.38% and 5.65%, respectively.
The Dow Jones (up +3.26%) the S&P 500 (up +3.84%) and the Nasdaq Composite (up + 4.36%) all did themselves proud as well.
This particular ranking is consistent when we look at the gains in the indices since the start of the fourth quarter.
Small-caps are crushing it... but all the indices are rising.
The strength in small-caps is somewhat surprising. (And it might not last.)
Just two weeks ago, on September 28, we said that: "... small-caps best large-caps most during the month of January. Their advantage gets smaller in the first quarter and vanishes in quarter four."
So far, we've not seen that seasonal effect take shape.
The market's "rising tide" is clearly lifting all boats -- small- and large-caps alike.
And the tide is rising. In fact, on Thursday, our #1 indicator made a very bullish move.
The New York Stock Exchange Bullish Percent Index (NYSE BPI) flipped from an O-column to an X-column.
This tells us that the market is now to be considered strong in the short term. (To see why that is, click here and read my commentary on our free NYSE BPI page.)
If it can fill in that purple box, the chart will go on a "Buy" signal, which will tell us that the market is strong in the intermediate to long term.
The three large-cap-focused ETFs that we looked at on September 28 are all doing well, as of Friday's close.
Vone is up +4.75%... IOO is up +2.83%... and OEF is up +3.59%.
Our Call option in OEF is up 21.85%. (This is a perfect example of how the right option can boost your returns.)
Also, the ETF we looked at just last week (“Who's Up for "Round Two" of Tech Profits?”) is performing as expected.
The Invesco S&P SmallCap Information Technology ETF (PSCT) has gained +7.5% in seven days. (We got in at the purple arrow.)
Importantly, strength is spreading into more and more sectors.
This snapshot shows how the 45 sectors are arranged in the market. The image was created on Friday by Sector Prophets Pro, our premium data program.
Blue boxes show sectors where Demand (the bulls) is in control. Red boxes show sectors where Supply (the bears) is in control.
As you can see, Demand now controls 31 of 45 sectors.
That's a dramatic improvement from the start of October, when the bulls controlled just 12 sectors (27%).
There are any number of ways we could play this market.
We could buy ETFs that track the strongest sectors.
We could short ETFs that track the weaker ones (or buy Put options on those sectors).
But today I want us to look at a sort of "sneaky" way to profit.
As mentioned above, earnings season is starting.
And as you know, earnings announcements are one of those events that practically everyone follows.
As often as not, following earnings, firms that beat expectations will see their share prices hop...
While firms that disappoint will see their share prices drop.
But here's the thing...
Those post-earnings moves, as often as not, are short-lived.
If a stock is technically strong... if it's outperforming the market and outperforming its sector peers... and if it's in a strong sector...
Then any post-earnings drops will likely correct themselves quickly -- perhaps in a matter of days.
Likewise, if a stock is in a poor sector... and it's getting trounced by its peers and by the wider market...
Then any pop following a strong earnings report will likely prove unsustainable.
Obviously, none of this is cut in stone. We're talking about probability here.
So, with that in mind, here are two stocks -- on strong and one weak -- set to report earnings in the next week.
Sleep Number Corporation (SNBR) designs, manufactures, and markets beds, pillows, sheets, and other bedding products.
The company reports earnings on Wednesday, October 14.
As you can see from this scene cap of the Position Key (a premium tool that comes bundled with Sector Prophets Pro)...
This stock is...
Arrow #1 and #2 - In a strong sector...
Arrow #3 - Outperforming its sector peers...
Arrow #4 - Outperforming the wider market.
If SNBR fails to meet expectations when it reports earnings... AND gets punished for it (takes a dive)...
You should buy the stock or, better, buy a Call option on it.
The reason is, again, that any dip is likely to be short-lived. You stand a good chance of banking a few percentage points in a matter of days or weeks.
On the bearish side...
HealthStream, Inc. (HSTM) provides "workforce solutions" for healthcare organizations in the United States.
The company reports earnings on Monday, October 19.
As you can see, instead of showing four blue arrows (strength)... HSTM's Position Key shows four red ones.
This is a very weak stock in a very weak sector.
If HSTM beats expectations when it reports earnings... AND gets rewarded for it (pops higher)...
You should short the stock or, better, buy a Put option on it.
It's probably falling back to Earth, and quickly.
Have a great week, my friend!
Editor-in-Chief, True Market Insiders