Trader Looks Beyond 3rd Quarter Earnings Season


Simpler Trading Team

3 min read

Traders need to be alert to what is happening in the stock market this week.

And much of the attention will be placed on earnings reports where more than 160 companies – including 12 of the 30 Dow equities – will deliver third quarter results.

What effect will this wave of reports have on the stock market and how can traders target market shifts?

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Seeking trades outside 3rd quarter earnings season

Much of the earnings season activity this week will focus on mega-cap technology companies that comprise the FAANG stock block.

FAANG stocks refer to high valuation technology companies  that are significant players in all three major indexes and include Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). Within the overall technology sector, Microsoft (MSFT) and Apple (AAPL) account for 40%.

What many traders may not understand this earnings season is that reports from these companies may not hold the sway once wielded in the stock market.

“I don’t believe earnings matter here,” said Sam Shames, Vice President of Options at Simpler Trading. “They will matter for a day or two, with more significance for smaller firms than mega-cap, but in general I continue to believe earnings this time around are irrelevant.”

Why would he hold such a contradictory viewpoint against this quarterly season of trading earnings?

“Because no one cares what a company did, they only care what they will do,” Sam said, pointing out that earnings reports look back at the most recent past quarterly performance.

“Why can companies not tell us with any real reliability going forward how they will do?” Sam asked. “Because they don’t even know what the price of money will be, much less how to gauge demand. It will all be a guessing game.”

Trader focuses on internal signals above earnings

Sam offered the insight that the current stock market is not concerned with earnings due to ongoing uncertainty in areas that influence the market.

“This isn’t an earnings story,” Sam said. “This is a bond market/dollar/liquidity story. Let’s keep our eye on the ball and not fall for the ‘magician’s’ tricks (earnings reports),” Sam said.

He plans to focus on market internal signals which are showing the struggles of the S&P 500 with only 28% of index stocks above the 50-day simple moving average (SMA).

“This continues to imply exactly what we have been noting that there is no rotation under

this market and everything will go green or red as a bloc,” said Sam, noting that this is bearish long term.

“I do have to note that this is also improving quickly and in the near term is a bullish signal,” Sam said. “It is bullish to see the internals leading price action and that is happening now.”

Sam continues to watch the Volatility Index (VIX) signals which he sees as slightly skewed toward a breakdown. This week will be a key turning point here. He pointed out that even during the 2008 crash the VIX had one final flush before the big move up across the market.

“Be aware that dynamic combined with VIX at 30+ will make this a volatile trader’s market, and while the direction is still lower in trend, the volume dynamics plus illiquidity will result in big moves in both directions,” Sam said. “Adjust your strategy and size for this.”

The VIX, or “fear” index was above 30 on Monday, and anything above 20 is considered high volatility.