If there's one thing we do really well at EarningsBeats.com, it's evaluate earnings reports and the stock market's reaction to them. I'd even take it one step further. I believe we anticipate upcoming earnings very well. There's a lot that goes into this evaluation. It starts with a solid grasp on the big picture. Are we trending higher or lower? I think, by now, you should know the answer to this question, despite the fact that so many want to talk themselves out of riding this secular bull market. As I write this, transportation stocks ($TRAN) are trading at an all-time high. Someone please explain to me how to paint that bearish.
But it goes way beyond calling the overall market correctly. There's the understanding of how the market works. Wall Street will tell you everything you need to know, if you're only willing to listen. This is where price, volume, and relative strength come in. A stock being heavily accumulated, which can only take place with price eventually rising and on above average volume, needs to be recognized. Why? Because once the accumulation has taken place, it's a very simple supply vs. demand issue. As supply dries up, a stock only heads in one direction. Many have been doubting Zoom Video Communications (ZM) and Peloton Interactive (PTON) since their meteoric rise in the Spring. It's honestly just Economics 101. There are more buyers than sellers. Did the pandemic fall into their lap from a business perspective? Yes, but why fight it. There have been significant signs of accumulation of both stocks for months and they've been delivering blowout results. And guess what? They'll do it again when they next report earnings.
The bigger problem for me isn't determining which stocks will report great quarterly results. I can usually get that part right. But what will the market's reaction be? I'll give you two examples - the bullish and bearish approach to an earnings report. These two reports were just released this week:
Bullish Chart - BLK:
At the very bottom of this chart, you'll see that asset managers ($DJUSAG) have not been a strong area of the market in 2020. Things have begun to improve in October, which is a start. The more important development on this chart are those blue circles. Despite being part of a weak industry group in 2020, BLK has managed to set new 52-week absolute and relative price highs. That's a leader. It's accumulation/distribution line (AD Line) has remained strong. That's confirmation. I said on my Trading Places show earlier this week that I expected BLK to report strong results and it was one of the few stocks reporting earnings this week that I actually liked. Check out BLK's numbers:
Revenues: $4.37 bil (actual) vs. $3.95 bil (estimate)
Earnings per share (EPS): $9.22 (actual) vs. $7.81 (estimate)
It really wasn't a shocker at all. Wall Street has adopted BLK as a leader among asset managers and the earnings report simply confirmed it.
Bearish Chart - DAL:
I really don't like airlines ($DJUSAR). Yeah, I know, I started this article talking about transports being bullish. But one thing I can promise you is it ain't because of airlines. Trucking ($DJUSTK) has been killing it since early-March. Railroads ($DJUSRR) have soared vs. the S&P 500 since the beginning of July. The airlines? Puh-lease. Fundamentally, how can anyone take this group seriously as a solid investment. We have two very major questions to answer. First, how long is COVID-19 going to impact travel plans, both business and leisure? Second, even post-COVID-19, what will the paradigm shift look like? I am one who believes that travel plans have been permanently changed. I'm not saying that people won't want to travel. I'm saying that many who used to fly might buy or rent an RV now. Flying will be changed forever and I honestly have no idea what the landscape will look like in 6 months, 12 months, 5 years, etc. Wall Street either doesn't know either, or it doesn't like what it sees. Check out DAL:
Look at those lower 4 panels. When I'm looking big picture and I see absolute and relative strength panels plummeting, I think one thought. Stay away. The AD line here isn't bad, so there is one positive, but it doesn't outweigh all the other bearish evidence. DAL has moved higher off of its panicked May low, but the recovery emphasizes my new Wall Street adage, "a rising jet stream lifts all planes". :-)
Now back to my RV thought. Think I'm crazy? Wall Street doesn't. The leader in RVs is Camping World Holdings (CWH). Look at CWH's chart:
See a difference? Do you think Wall Street is placing bets? Warren Buffett, arguably the best investor of our time, sold all of its airline holdings months ago. Every. Single. Share. I wonder if he's investing in RVs.
Listen, I'm not making any of this up. I'm simply reading the charts. I haven't done any market research. I haven't polled Americans while sitting in a Starbucks writing my blog articles to see if they intend to travel by RV. I'm just analyzing the charts. They tell us so much, if only we'll listen.
Later today, at 4:30pm ET, I'm hosting a FREE Sneak Preview: Q3 Earnings webinar where I'll be interpreting many charts as companies prepare to release their upcoming earnings reports. If you'd like to join and get my take, I'd love to have you! Anyone joining the webinar will be added to our EB Digest newsletter, which is also FREE and is published 3x a week on Mondays, Wednesdays, and Fridays. There is no credit card required and you may unsubscribe at any time. Here's the link to today's webinar.
https://us02web.zoom.us/s/81730737635
The room will open at approximately 4:00pm ET, 30 minutes before the webinar start time.
Happy trading!
Tom
