The stock market’s comeback from the lows reached just two weeks ago is legendary stuff. Just a year ago the same type of rally occurred with some very powerful price action, a nearly 200 handle move in the SPX 500. This followed the threat of an ebola crisis, a steep drop of 9.4% from the all time highs amidst an unknown outcome that seemed to cause everyone to pause or even panic. Of course, that fear subsided quickly and that big rally caught many out of position. Bears hung on too long and were once again routed (though they had their day in the sun – no doubt).
Yet, as this recent move upward is stunning and persistent, it comes on the verge of big earnings releases. Estimates have come down and the bar has been lowered substantially, so perhaps many companies will show a beat on the record. Have stocks moved ahead of their earnings? It’s quite possible that is the case, and now with a very overbought market we could be looking at some pullback even if numbers are exceeded.
The good ‘feelings’ of rallying higher from the October 2 lows may continue a bit longer if earnings guidance is strong. Of course, we don’t want to rely on that notion for our trading strategy, rather we’ll take a more pragmatic and technical approach. The charts are extended here but that doesn’t mean we cannot continue higher. Overbought can stay overbought for longer than anyone can imagine. It is when the euphoria dies down and the indicators start to turn south is when the markets will pullback. Trying to guess and time a turn lower is foolish. The trend will change and will pace your next move.
Playing names during earnings season is always a bit tricky, but since we have to deal with this four times a year and with elevated implied volatility we should be able to get a good read on those names that are worthy of a play before and after. I’ll be playing this a bit tighter than usual, looking for the price action and technical signals to give the clues. I will be looking for volatility (strangles/straddles) to play in addition to follow-on trades post release (if warranted by flow, stock volume, chart patterns and technical signals).