Should You Hold Google and Other Mag 7 Stocks Into Earnings News?
Here is my strategy as we head into the news.
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Market action on Tuesday morning is mildly negative as worries build about how major technology stocks will react to their upcoming earnings reports. There are also concerns about Iran, higher oil, the upcoming Fed interest-rate policy decision, and other factors, but earnings news on Wednesday night is likely to be what determines the market's direction more than anything else.
After the close on Wednesday, Microsoft (MSFT) , Google (GOOGL) , Meta (META) , and Amazon (AMZN) report earnings. Apple (AAPL) follows on Thursday and Nvidia (NVDA) won't report until May 20 but will be greatly affected by these reports.
I'm not bearish but I want to do some repositioning and lower my risk. My primary goal is to keep my client accounts as close to their highs as possible so that we can harness the power of compounding. I want to try to avoid big drawdowns, which often occur when holding into earnings news.
My approach to this is a function of trading in multiple time frames. I'm not a long-term buy-and-hold investor and I’m not a pure short-term trader. I use a wide variety of time frames to manage risk. I'm not worried about missing out on upside because I can always buy aggressively when I feel the time is right.
How to Play the Reports
So how should you play these major reports?
The first issue to consider is your holding period. If you are a long-term investor and still believe that the thesis for your investment is in place, then you do nothing. Maybe you look for an opportunity to add to your position if there is a pullback but there is no reason to rush to do anything if you have a longer-term time horizon. You are trusting that you will be amply rewarded in the long term.
If you are at the other end of the spectrum and are a day trader or very short-term trader, then there will likely be some interesting volatility. If you have a short-term time frame the smart move typically is to trade the reaction to a report rather than bet on a beat or a miss. Betting on earnings news appeals to the gambling instinct, but from a strategic standpoint, the risk/return ratio is much better if you trade the volatility following the news.
If you are a position trader with an intermediate time frame, there will be some interesting strategic considerations. For example, selloffs in some of the leading mega-caps tend to be good opportunities for position trades as these stocks are often bought by big institutions after pullbacks.
My Repositioning
My approach is to trade in a variety of time frames which complicates matters quite a bit. As I discussed recently, I took a larger-than-normal long position in Google (GOOGL) . It has now enjoyed a substantial run and is trading strongly ahead of earnings. I still think it is the best of the Magnificent Seven names and will go much higher, but I cut my position in half this morning.
I don't think Google will have a bad report but I want to reduce my risk into the news. I will look for some new buys after the news. I'm not worried about missing out, which is what drives most folks to hold on to a stock in front of an earnings report. Rebuying is easy and if I have to pay a higher price that is the cost of insurance.
On Meta, I don't like the recent news flow and the price action, and I dumped it completely. It is just below key resistance at the 200-day and after the reaction last quarter to a great report I'd rather be on the sidelines.
On Nvidia, I have a small position and will look to add if it sells off in sympathy to some of the other Mag 7 reports. It still appears to be a good value but it is facing increased competition and we’ll see how that develops as we listen to conference calls.
Over my many years of trading, I have consistently experienced my worst drawdowns as a result of negative reactions to earnings. The only way to deal with that is to reduce risk exposure and that is what I'm doing. I've raised my cash levels to over 40% but I am prepared to be an aggressive buyer as buying opportunities arise.
Related: Charting GE Healthcare as the Sector Sees a Pullback
At the time of publication, Rev Shark was long GOOGL and NVDA.
