Check  Your  Greed  During  Earnings

The Game of Chance

Stocks are always dear to the outside public when prices are low and distrust prevails.  If they are bound to speculate, this is the very time when they ought to buy for a "long pull".  But they have no confidence and will not come in.

When a great movement has been projected, and the bubble has become inflated near its utmost tension, then it is that stocks look cheap.  People are imbued with the belief that the extent of the rise has no limit.  They rush in to buy and are supplied by the insiders, who have planned for just such a consummation.  The result is they get left.  Twenty, thirty or forty percent, margins are wiped out.  Or, if financially strong, they have to wait years, perhaps, for another boom to come round to let them out whole.

The saying,  "A fool is born every minute,"  is said to have originated with one of the most prominent operators in Wall Street.  Certain it is that a new crop of fools is always counted upon and seldom fails to respond to the allurements offered.  

Mr Jamie Catherwood (The Finance History Guy @investoramnesia.com) tweeted a week ago the above passage from 1887 book on  "Plain Truths about Stock Speculation".  His tweet resonated with me particularly in the current market.  $QQQ,  the leading Growth Stock index is  +41%  in the last 15 weeks since the  'Follow Thru'  day of April 3rd.  That's  +2.73% per week.  At this rate the the  $QQQ  would be  +142%  annualized.  We all know that is an unprecedented move and certainly not sustainable.  Our  GREED  sets in and we start to extrapolate the results of the movement in the stocks we own.  

How  Should  One  Decipher  Data  to  Check  Greed?

Use  Technicals  to  Guide  You

Earnings calendar for the second quarter is picking up pace this week with over 10% of the  $SPY  components slated to enter the confessional booth.  Last week  $NFLX (+45.8% since  'Follow Thru'  day of Apr 3rd) dropped  -7% during  earnings report.  They actually had an increase in total subscribers but the institutions still didn't support the stock.  Some institutions probably decided to harvest profits with part of their positions - just as we as retail traders do the same when there are profits of  +20%  to  +25%  in the stock.  This is one reason why one should never go into the earnings report day with the entire position.  

Here are some of the technicals to utilize to help guide you in assessing the risks of holding stocks through the earnings season.

1. Check and see how far the stock is from the 50 day (sma) simple moving average.  Ideally it would be best if the 50 day sma is closer to the 21 day ema(exponential moving average).  Further away the stock is from the 50 day sma, greater the risk one has should the stock drop to that level.
2. Check to make sure your stock is the leading stock and trading above the 21 day ema.  If it is trading at 8 ema or 10 sma, it reflects momentum of the stock.  That's a leading stock.
3. Stocks tend to move closer to where the open interest with options on the stock is trading at.  Most stocks tend to show an open interest at the $10 level above or below the closest monthly or weekly option chains.

Following is what I find looking over the 8 leading Growth Stocks that are reporting earnings this week.  Use that as a guide to help you decide how much of a risk to take off prior to earnings.  It's so easy for us as retail traders to get our emotions spiked during earnings and think that the stock would go all the way to heaven.  Stocks go up in a stair stepped fashion.  They go up and rest for a while building a flat or 3 weeks tight or a shallow cup base.  Sometimes the stock may consolidate for several weeks before making the next move higher. 

Looking over the technicals, I would consider stocks in red and in bold letters (bottom 4 stocks) to be at a higher risk and would reduce holdings through the earnings report.  I am indicating how far the stock is from the 50 day sma in %.  Farther away it is from the 50 day sma, greater the risk should the stock pull back to the 50 day sma.  It's quite normal for the stock to test that level when it has made substantial gains since the  'Follow Thru'  day.  In parenthesis are the Call Options with the highest open interest.  That is what the market makers are expecting the stock to move towards.

1. $CMG   ... 8% (1130/1140/1150)
2. $PETS  ... 10% (40/50)
3. $TMO   ... 10% (390/400/410)
4. $TXN    ...  8% (135/140)
5. $ALGN  ... 17% (320/330)
6. $IBKR   ... 20% (55/60)
7. $ISRG   ... 15% (650/660)
8. $TSLA   ... 30% (1500/1520/1530/1540)

Happy Trading!

Amin