Dear Reader,
CJ here.
By my nature, I don’t often trade an option or stock position ahead of earnings reports.
Why? Well, it’s very simple.
In general, the market’s response to earnings is unpredictable.
As a trader and investor, I like predictability.
That’s why I’m a little surprised that Apple has caught my attention as a trade, just one day ahead of their earnings results…
And I’m trading it this time.
Here’s what caught my eye…
Over the last four days, shares of Apple (AAPL Inc.) have rallied almost 4%. That may seem like nothing to most people, but for me, it sticks out.
You see, the bank stocks typically see this type of activity – 4% rallies – ahead of their earnings releases.
Last week, shares of Alphabet Inc. (GOOG) rallied – you guessed it – 4% the day ahead of their earnings release.
It happens more often than you would think. And it represents something we’ve all heard about…
It’s the “buy the rumor” rally.
Stocks, especially well-known stocks, often see a pattern that is referred to as “buy the rumor and sell the news”. It has everything to do with investor sentiment.
And the current market is being driven heavily by technical trends and sentiment.
This is how it works.
Investors and traders begin to speculate on a stock’s earnings based on what they hear in the media in the week heading into the company’s earnings release.
If the media is sweet on a stock ahead of earnings, they’ll talk it up. If they’re sour on it, they’ll let you know that their outlook is less than bullish.
Here’s a great example – Disney ahead of last quarter’s earnings…
This is the view that Barron’s gave you…
Just a little more than a week ahead of earnings, Barron’s told us that the stock was ready for a rebound.
So what happened?
The stock rallied a little more than 4% into earnings (there’s your tell) -only to trade 7% lower the following 10 days – and then another 9% lower over the following month.
Buy the rumor….
Let’s get back to Apple since there’s not much time…
Apple is considered one of Wall Street’s favorite stocks. That’s a problem. It typically means that the stock is priced for perfection ahead of earnings. And that means that any disappointment will spark a barrage of selling on the shares.
Just last week, Barron’s reported that the central bank of the Czech Republic had been buying shares of Apple, Tesla, AT&T, and Microsoft.
That’s the type of headline I like to see as part of these earnings-based trades. And as I’ve already mentioned, the stock is trading 4% higher.
Let’s get down to a few other details though. Keep up because here’s where I’ll pick up the pace.
My earnings performance summary for AAPL stock shows a few trends that are interesting.
First, each and every one of the October or November results over the last five years have seen the stock trade lower after the announcements.
On average, AAPL stock trades 0.8% lower in the two weeks following all their reports.
Reports delivered in October or November result in average returns of -4.2% in the two weeks after the report. That’s a big divergence – and one trend that’s worth considering as part of my trade driver.
Next, the technicals….
The recent rally (4%) moved AAPL shares above their 200-day moving average. This trendline is one of the most-watched technical indicators by the market. Breaking back below this trendline will almost certainly cause a large increase in selling pressure.
Remember, this is one of the most widely held stocks in the market. To hear the media report that the stock is back below its 200-day will cause a stir amongst the Apple Bulls.
Finally, the stock is trading below its 50-day moving average, which is in a bearish trend. These are two technical marks against the stock and should be cause for the bulls to worry.
Finally, the fundamental picture…
We all know that the consumer is beginning to show signs of weakening. While Apple is seen as a service company, the iPhone and other products are the gateway to those services.
We’ve seen weakening demand for Apple’s phones both here in the U.S. and abroad. Recent headlines have focused on concerns that the Chinese market – a market that has been seen as a new opportunity for Apple and its products – is cooling for the retailer.
Put simply, the fundamental picture is less than bullish for the company.
Let’s Bottom Line This
As I said in my opening, it’s not often that I choose to trade ahead of an earnings report, but I have decided that the risk-reward picture for Apple is leaning to the bearish side of the equation enough that I have a slight advantage.
Here’s how I’m trading the stock ahead of earnings:
I’m using the December 15, 2023 AAPL $175 puts to initiate an intermediate-term bearish position. The option is currently priced $7.10 per contract, which puts my risk at $710.
I’m also considering a vertical put spread using the December 15, 2023 AAPL $175 (buy-to-open) and $165 (sell-to-open) strikes. This strategy would lower my cost to $375 with the potential to return $620 if the stock moves to $165 or lower before December 15.
The potential for overhead resistance from AAPL’s bearishly trending 20- and 50-day moving averages should help to avoid seeing the stock break into a new bearish trend. These two trendlines will define my stop-loss strategy.
In addition, a break back below the stock’s 200-day moving average ($170) will increase selling pressure to create a fast and aggressive selloff that would benefit either of these bearishly postured positions.
We’ll check back in on this position next week after the earnings report has been digested by the market.
Until then, I wish you the best trading success.
CJ
