Mitigate  Risk  During  Earnings  Report

This week, We will be in the midst of second quarter earnings season.  We have over 10% of the  $SPY  companies reporting earnings.  Stocks that are fundamentally strong with strong technicals will usually break out when earnings get reported.  If the institutions have a firm conviction in the stock, they will start bidding the stock higher.  They control  75%  of the total daily volume in the stock market.  Their conviction in the stock is what will move the stock up or down.  The fuel to spark a surge in the price of growth stocks is accelerated earnings and increased sales every quarter.  It's never the P/E ratios.   

Growth stocks tend to outperform the general stock market - using the performance of the  $SPY  as a barometer - by 2 to 2.5 times.  They also drop down by just as much when they top out and face profit taking by the institutions.  We have been in a new bull market since attaining the lows on March 23rd.  Growth stock index  $QQQ  has been trending along the faster 10 day sma (simple moving average) for the past 16 weeks.  It has visited the slower 21 day ema(exponential moving average) 4 times during that time but never pierced it.  That is a sign of a good healthy uptrend.  Currently it is trending above the upper trending channel and it's due for a mild pull back down to the 10 day sma (-4.19% correction).  It's quite normal for the index to retrace back to the 21 day ema (-5.77% correction) after having gone through 16 weeks of slow and orderly progress along the 10 day sma.

The strong uptrend that we had from the lows of Dec 24th 2018 to May 3rd lasted 19 weeks before it corrected  -11%  in the following next 4 weeks.  Similar retracement of the  $QQQ  would bring us back to the highs we had attained on Feb 19th.  With the earnings being reported by the underperforming financial banks and the airlines and other transport industries of rails and the trucking company, one should expect the market to be volatile.  We also have one of the strong   FAANG  stock ($NFLX +48.62%  since Apr 2nd  'Follow Thru'  day).  It was  +8.50%  on Friday July 10th with trading volume over  +250%  of the average daily trading volume.  One can expect there will be some profit taking by the institutions in the coming weeks.  

Action  Plan  This  Week

July traditionally is a very weak performing month.  With volatility increasing due to the earnings season, it's critical to watch your stock positions and monitor signs of trouble if the stock begins to falter.  Unless you have a substantial profit cushion in a stock, it's prudent to not allow gains of over  +20%  or more to evaporate.  Markets don't always go straight up every day and every week.  Stocks take a breather and they climb up in a stair step fashion.  It's never a good idea to have your entire stock position at risk during earnings report.  Earnings report could be good and yet the stock could drop.  Similarly the stock could rise if the earnings report is weak because the institutions like what they see and hear.  

One of the things to look out for is to see if your stock position begins to pierce the 21 day ema and trades below it.  Defensive acton would be to start scaling down your position as the stock begins to falter down to the 34 day ema.  During the last 2 strong down ward sharp correction in  Oct/Dec 2018  and  Feb/Mar 2020, it took both the indexes  $SPY  and  $QQQ,  just 3 trading sessions to bring it down from an all time highs down to the 50 day sma.  That's a brutal correction and hopefully we all have learnt a good lesson from it.  Hopefully we will all be better prepared should the market falter or go through to a  milder correction of  -4%  to  -10%.

IBD  Style of Investing in Growth Stocks

https://youtu.be/cpNVHCydUr8

Mr Jim Roppel, hedge fund manager explains how he utilizes the IBD(Investors Business Daily)  CANSLIM  system of investing in Growth Stocks.  It's an excellent interview and I have watched it a couple of times.  I had tweeted this utube video a couple of times last week for the benefit of my followers.  He emphasizes selecting the best of the best stocks in the leading groups and leading sectors.  He firmly believes that in order to make a big difference in your portfolio performance, one should concentrate the stock portfolio to just a few stocks.  He has adapted the system to his style of trading and his personality.  

Enjoy the video and save it for your digital library to replay it.  Let me know your thoughts and take away from this video.

Happy Trading

Amin