Holding pat until the earnings maelstrom begins to wane
Yesterday’s Tematica Investing weekly issue was longer than usual due to the simple fact that we are now in the thick of 3Q 2017 earnings season. As we witnessed, the periods of “earnings weeks” can be volatile ones for the stock market, and both last week as well as this week the market has moved based on the day’s earnings reports as well as those from the prior evening. In short, this means that in the near-term thematics and fundamentals will give way to stock moves based on earnings beats and misses relative to expectations. This gets tricky when a company beats on one financial metric, like EPS, but misses on another, such as revenue. Or it nails its 3Q 2017 figures, but flubs with its guidance that falls short of expectations.
Over the last four months, we’ve had a number of high profile call option returns, and we’ve taken some lumps as well, but overall the performance has been better than solid. In each case, especially the very successful trades, we’ve identified the right underlying security, the right thematic tailwind, and the right catalyst. We saw this most recently with our call trades in Corning (GLW +92.10%), Applied Materials (AMAT +106.50%), Home Depot (HD +102.53%) and Wal-Mart (WMT +180.52%), and the list goes on.
Between now and at least next week, the earnings noise will be raucous and today we are supposed to get the GOP tax reform bill, which was postponed for another round of final negotiations. Tax reform has been one of the drivers behind the stock market’s post-Labor Day melt up, and given the market’s current valuation any perceived shortfall in the proposal could weigh on the market in the short-term.
For all of these reasons, we are holding pat this week and keeping our dry powder intact. I’ll continue to review potential thematically focused call option trades that we can put into action as 3Q 2017 reporting begins to wind down next week.
Housekeeping!
Early this week, we were stopped out of the United Parcel Service (UPS) Jan 2018 130.000 calls (UPS180119C00130000) when they crossed our stop loss at 0.30. With Halloween now behind us and as we head into the thick of the holiday shopping season, we’ll keep an eye on UPS calls for a more profitable opportunity.
