Netflix Stock Jumps As Stock Market Rallies

In this article:

• Netflix highlights market rally
• Market ‘bakes in’ bad news
• Three market signals to watch

With all the bad news – economy, politics, inflation, etc. – traders keep asking why this stock market isn’t rolling over and dying.

The answer is more complex than the question. The short version is that much of the bad news falls into the hype being blared by the “stress entertainment” media outlets who don’t dig into the details.

Yes, as Simpler Trading has stated before, news events are important market-influencing factors to consider when trading. But unlike news hype, these news events include economic data reports, payroll reports, market phases (like earnings season), and federal monetary policy news releases.

What the media outlets often miss is the fact that what they talk about is often lagging information from the past and that all this information is already “baked into” how the stock market will react.

Netflix stock jumps in stock market rally

Simpler’s traders start fresh each day analyzing what is happening in the market and why the market is reacting to any given variable. They want to predict where the market, or a particular stock, might be moving.

A recent example of how the market “bakes in” what others perceive as “breaking news” is how Netflix (NFLX) rallied after losing 970,000 subscribers in the second quarter. This news “broke” after market hours Tuesday when Netflix reported quarterly earnings.

Netflix stock jumped in price during after hours trading and pushed higher Wednesday, closing at $216.44, up 7.35% on the day.

Why didn’t losing almost a million paying subscribers hurt the stock price?

Because Netflix had weeks before warned that it might lose as many as 2 million subscribers. Losing less than a million subscribers was positive relative to the larger expected loss, and that “positive” turned into a rewarding reaction from the market… and traders breathing a sigh of relief. 

This example may be a bit oversimplified, but shows how the market can actually reward company failures if earnings results are more positive than expected. 

Keep in mind that during earnings season the flip side may hold true. The market is known to almost punish a company who reports positive earnings results, but the numbers weren’t high enough for market expectations. This was regularly the case following first quarter earnings this year when stock prices fell after quarterly reports.

In a recent recap of setups surrounding the second quarter earnings season, Danielle Shay, Vice President of Options at Simpler Trading, made a few ticker selections.

One of Danielle’s target tickers was Netflix (NFLX) before the company reported quarterly earnings on Tuesday.

“Basically what happened was exactly what I called on CNBC last week,” Danielle said. “Even though Netflix earnings weren’t great, they are rallying because they were better than terrible and a break above $200 is where I expected a bullish move higher.”

Netflix closed Wednesday at $216.44 and Danielle anticipated that $220 was a solid target.

“I covered earnings in general and the ‘flavor of the season,’ which means that every earnings quarter is a bit different and this quarter we are seeing a pattern where bullish companies that are still strong have room to rally and even companies that are weak can rally if results are better than expected,” Danielle said.

Danielle went on to detail how these earnings moves have caused the technical stock chart patterns to significantly improve and may lead to breakouts into earnings next week that are laden with the biggest technology companies, such as Apple and Google.

Watch Danielle’s market coverage here: CNBC video from 7/14  –

Another example of the market baking bad news into its reaction is Apple (AAPL). 

Apple has been communicating upcoming uncertainty in its earnings report due to potential layoffs. These can be attributed to higher costs of business due to lost sales in overseas operations thanks to the U.S. dollar spiking higher.

It is anticipated that the market will bake in these negative influences on the Apple bottom line and lower expectations when the company reports second quarter earnings on July 28.

This earnings report date could be dicey because the Federal Reserve (Fed) is expected to release the next benchmark interest rate increase intended to battle rising inflation.

Apple market valuation has long dominated as a bellwether marker in the stock market. Apple earnings reports, if bad, combined with raising interest rates higher than expected could send the market spiraling.

Market indicators to watch during volatility

With the constant twists and turns in this volatile bear market, we gathered some market signals that Simpler’s traders continue to follow when anticipating price movement.

Here is what traders are watching in relation to the S&P 500:

• $SKEW.X (Cboe Global Markets SKEW index) – This technical tool tracks volatility skew in options. Skew calculates volatility difference between in the money options, at the money options, and out of the money options. This has proven to be an indicator of whether fund managers prefer to write call options or not. The index operates on a scale from 100 to 150 with the higher number showing that fund managers are more nervous about a two-standard of deviation correction. The $SKEW was at 120 on Wednesday and ranged as high as 170 in April.
• VIX (Chicago Board Of Exchange (CBOE) Volatility Index) – This index anticipates market volatility over the next 30 days. The VIX is considered the “fear” index and has been trending lower the last week, ending just below 24 today. A level above 20 is still considered high volatility – more fear in the market. Simpler’s traders have estimated the VIX could be on a trajectory to spike as high as 40-50 within the next six months and possibly as high as 100 by October, 2023.
• DXY (U.S. Dollar) – Markets tend to trade lower if the dollar trades higher. The DXY closed up .35% at $107.06 on Wednesdaysday. Markets are expected to grind lower if the dollar trades higher. For the stock market to have a solid chance of a rally, watch for DXY under $104.

One area where the hyped news may be sorely lagging behind is looking ahead in the stock market.

Simpler’s traders are leaning into the $SKEW numbers showing extremely high levels before the summer doldrums hit. With the $SKEW at 120 on Wednesday, this may show a bit of “relief” from fund managers and a possible higher move in the S&P 500 for the near term.

That being said, expectations are that the S&P 500 and stock market overall could get ugly again in October if the $SKEW heats up again.

A variety of market influences are on the way in the next week to 10 days, including that Fed storm on July 28.

Look back to analyze what lies ahead

Simpler’s traders often encourage others to take a thoughtful look back at trade setups in an effort to analyze the good and bad in that decision process.

Here are a few past “watch” stocks mentioned in Simpler Insights in May heading into the second quarter earnings season and where those tickers are priced as of Wednesday:

• Microsoft (MSFT) – Continuing in a downtrend, trading below the 34 exponential moving average (EMA). Possible short trades with target prices aligning with downtrend, and watching for squeezes in lower time frames. (MSFT closed at $262.20.)

• Google (GOOGL) – Previously looked like a “go” at the 50 simple moving average (SMA) at its previous high. If it can move higher going into the July stock split is a big “if.” Might be a bullish play, but not counting on it as an egg in the basket. (Currently not a special watch list stock. GOOGL closed at $113.67.)
• Apple (AAPL) – Charts for AAPL are setting up much like MSFT. Seeing chop through June with resistance levels keeping plays to the short side. (AAPL closed at $153.30.)
• Amazon (AMZN) – The AMZN 20:1 stock split is a done deal. Traders must work new, lower price levels while not forgetting company performance to this point. AMZN didn’t rally much into the split, so trades to the upside are speculative considering the overall downside pressure in technology and services stocks. (AMZN closed at $122.68.)
• Tesla (TSLA) – Elon “Twitter Me Fiery” Musk keeps blowing up social media as the electric vehicle company bounces along in a state of chop and drop. Similar to the others (above), expectations are that only a major reversal could signal trading TSLA to the upside. (TSLA closed at $745.82.)
• Advanced Micro Devices, Inc. (AMD) – This ticker perked up a bit on the charts and a market gap up may offer shorter term upside plays. Otherwise looking to sit back and watch. (AMD closed at $88.83.)
• Nvidia Corp. (NVDA) – NVDA also has a short-term upside tick, but not something to get excited about too soon. Waiting for the overall market and technology sector to chime in for possible setups going forward. (NVDA closed at $178.59.)

A stock that has attracted the attention of Simpler’s traders this earnings season is United Healthcare (UNH). This stock has been a “beast” holding strong during this volatile market when other stocks faltered along with the indexes.

Danielle called attention to UNH during her recent media segment on CNBC.

UNH is a ticker being considered for swing trade potential with expectations for UNH to push toward all-time highs. The stock has risen 13% since June 17 and closed Wednesday at $521.31, down 2.30% on the day.

In the market today, the Dow closed at 31,874.84 points to gain .15% (adding 47.79 points on the day). The Nasdaq highlighted the day, rising to 11,897.65 points for a 1.58% tumble while the S&P 500 gained .59% to 3,959.90 points.

Looking for rally into fall before market bottoms

With all the price movement and “baking in” all the action by the stock market, Simpler’s traders don’t see a bottom in the market just yet.

Expectations are for a continued choppy summer season that leans to the upside (within an uncertain overall bear trend). The market could repeatedly try to rally into September.

By the time October rolls around, the market could be setting up for a horrific ride.

As with any day in the market, a lot can happen until the next event happens.

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