yesterday, I wrote in this piece that the best trading strategy for this earnings season may be to fade the initial move in reaction to releases. The logic was that in a quarter where comparisons and estimates were difficult given the distortion that we saw a year ago, the market’s first take on earnings will be reconsidered and corrected a lot of the time. Already, this morning, we have seen that in operation, albeit in microcosm, following the release of Q2 results for JPMorgan Chase (JPM).To get more jpmorgan latest news, you can visit shine news official website.
As you can see from the chart above, the initial reaction to the news from the bank was negative, but a bounce-back quickly ensued. That pattern sets the tone for what I believe will become a regular occurrence during this earnings season, where the immediate reaction in a stock to a release makes sense in terms of market positioning and dynamics, but bears no relation to the logical conclusions that longer-term investors will draw from the report.
From a positioning perspective, the market overall has been bullish for a long time now, and that has led to some being over-extended in the more obvious areas, financials being one. That means that there are a lot of traders looking for a catalyst to take a profit. Earnings releases provide that, even if the bare numbers don’t look like a reason to sell. Then there is the feeling among short-term traders that so much good news is priced in at this point that even a beat barely meets the real expectations for a stock, so selling on what looks like a good report makes sense.
The simple fact is that JPMorgan’s results, and Goldman Sachs (GS), were way better than even an optimistic market expected. Both banks beat on the top and bottom lines and did so in a way that suggests there is more to come. Their investment banking divisions outperformed, for example, as did money management. Those are both areas that benefit from stock market strength, so unless we see a major reversal in market sentiment, they can continue to do well even if a slow grind up is not the ideal environment for generating trading profits.
As earnings season progresses, there will undoubtedly be some disappointments. There always are. However, you should remember that, even with the exceptional events of the first half of last year, on average over the last five years, seventy-five percent of SP 500 companies have beaten expectations for earnings each and every quarter. Early releases indicate that this quarter is no different, with 15 of the first 18 SP 500 companies beating on EPS and 17 of those beating on revenue.
Assuming that trend continues, what we saw this morning with JPM will continue as well. There will be a lot of knee-jerk selloffs of stocks even on good earnings reports because of a market that is leveraged and looking to sell, but even in that context, good news is good news. Inevitably, that will create a lot of opportunities for investors to pick up some stocks with good prospects and strong momentum at a discount. At some point, the conditions that are driving this bull market, massive fiscal and monetary stimulus being added to a recovering economy and an already buoyant market, will have to end. It remains to be seen what happens when it does but until then, selling on good earnings reports such as we saw this morning with JPM will be temporary disruptions that create buying opportunities, not worrying signs of negativity.
