Watch for Market Correction as Big Banks Issue Reports
Once again, a weak open is being bought by investors who are struggling with FOMO.
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Second quarter earnings season will start next week when JPMorgan Chase JPM, Citigroup C and other money-center banks issue their reports. The bulk of earnings and the very important technology stocks will start reporting in the following week.
These reports will determine whether or not the recent market uptrend continues or whether we are finally hit with the anticipated market correction that the bears have been predicting since the bottom was hit in April.
The big run since the lows creates potential for a "sell the news" reaction, but it is extremely important to watch how the charts develop right in front of the reports. It wouldn’t be surprising if there is some profit taking before the announcement day, as some investors reduce their risk.
What is most important is to have a plan on how you will handle earnings news. Many retail traders like to bet on a positive response to earnings, but that is just a roll of the dice. Astute speculators will have a plan in place for a variety of outcomes.
A good example is Xeris XERS, which is a little biotechnology stock that I have mentioned quite often. It is a small cap, and that means it will report late in the cycle, probably in August. I believe the report is likely to be solid, but my plan is to be in a position to add shares in the event of a negative response to the report. It may not happen, but there should be some tradable volatility in front of the news that will allow me to adjust my position size.
At the other end of the spectrum is Nvidia NVDA. NVDA is a month behind the other big tech names because it has a quarter that ends in July rather than June. It is going to react to some of the reports from the big AI players, and I suspect that will create some trading opportunities. It will report late in August, so there will be plenty of time to position in that name before the news finally hits.
The good news about earnings season is that there are always a few new winners that have made significant progress and can develop into very good momentum plays.
The market is gaining some strength after a weak open. Breadth is around even, and the Russell 2000 small-cap index IWM is leading again. The biotechnology sector IBB that I highlighted on Wednesday is seeing good momentum again and is inching over its 200-day simple moving average. I remain optimistic that the group is about to embark on a major improvement.
At the time of publication, DePorre was long NVDA and XERS.
