A 5 chart sampling below and the Bottom Line taken from the comment plus 45 Charts Don Vialoux analyses in this great Monday comment. Read it all HERE
The Bottom Line
Reasons to own equities in the short term are less than compelling. Exceptions exist in selected sectors with favourable seasonality (e.g. gold, health care, agriculture, consumer staples). They can be purchased on weakness. (Charts below)
Protecting your investments during a volatile earnings report season
Second quarter earnings report season is upon us. Significant price fluctuations frequently occur when quarterly results are released. What is expected this quarter?
Greater than average fluctuations are expected this quarter due to the simultaneous release of good and bad news. On the positive side, consensus estimates are anticipating strong earning gains by major companies listed on U.S. and Canadian exchanges. Earnings by S&P 500 companies are expected to increase by 27 percent on a year-over-year basis. Earnings by TSX 60 companies are expected to record an average (median) gain of 13 percent. On the negative side, economic activity in the second quarter on both sides of the border slowed significantly from robust levels recorded in the first quarter. Many second quarter reports are expected to include negative guidance relative to optimistic projections offered in first quarter reports.
What is an investor to do to protect against significant changes in market value during the current earnings report season? The answer rests in listed options. Conservative listed option strategies offer opportunities to define risk parameters and to continue to participate in the underlying trend of a favoured investment. Let’s look at a couple of examples.
Apple (AAPL $250) is a name that is well known for its equity market leadership. The company releases its second quarter report this Tuesday. During the past five years, the stock has deviated up or down by an average of 5.85 percent on the day following release of results and by as much as 25 percent in the following quarter. Positive results were recorded in 14 of the past 22 periods.
An almost costless approach to participate in the upside potential of the stock is to own a Bull Call Spread offset by a longer-term put. An investor buys October 260 calls for around $17 and sells October 290 calls for around $7. Net cost is $10. A further offset is realized by selling January 200 puts for $10. Net cost is close to $0.
Why sell the January 200 Put? January customarily is the time that Apple reaches a seasonal peak. Chances are good that the put option requiring purchase of the stock at $200 will expire out-of-the-money and valueless. The strategy offers protection against downside risk to $200 and offers profit potential if the stock advances to the $260 and $290 range.
Gold has been in the news lately due to its “flight to safety” properties, resulting in all-time highs in the value of the commodity. With Barrick Gold (ABX $43) set to report at the end of this month, the company is expected to benefit. During the past five years, fluctuation of its stock price has averaged 3.20% on the day of release and by as much as 14 percent in the following quarter. The same strategy can be employed by using October 44/48 Bull Call spreads and January 35 puts. Seasonal tendencies in the last half of the year are positive for the stock as a result of greater demand for the commodity over this period.
These strategies are for sophisticated investors with a bullish intermediate outlook, who also want to protect against an unexpected downside event. It should be noted that equity purchases are required if their prices decline by more than 20% by expiration of the Put leg in January. However, analysts are targeting gains of at least 20% for both stocks. Upside potential exceeds downside risk during a period when both stocks are notorious for their wild price swings.
The S&P 500 Index fell 13.08 points (1.21%) last week. All of the drop occurred on Friday. Intermediate trend remains down. Support is forming at 1,010.91. Its 50 day moving average currently at 1,090.21 proved to be a reliable resistance level for the third time in three months. MACD and RSI currently are neutral. Stochastics are short term overbought and showing early signs of rolling over.
The TSX Composite Index slipped 0.90 points (0.01%) last week. Intermediate trend remains down. Support may be forming at 11,065.53. The Index found resistance near its 50 day moving average once again. A Death Cross likely will be recorded as early as today. MACD and RSI are neutral. Stochastics are overbought and showing early signs of peaking. Strength relative to the S&P 500 Index remains positive.
The Canadian Dollar lost 2.22 cents U.S. (2.30%) last week. Most of the decline happened on Friday. MACD and RSI are neutral. Stochastics are short term overbought and showing early signs of rolling over.
Crude oil also was virtually unchanged last week. Resistance was found at it 200 day moving average. Short term momentum indicators are neutral to over bought.
Gold fell $18 last week. Most of the decline occurred on Friday. Short term momentum indicators are trending lower with Stochastics trying to recover from oversold levels. Trading range during the past three months is $1,166.50 and $1,265.00 U.S. per ounce. Gold continues to outperform the S&P 500 Index.
Technical Analysis and comment by the highly respected Don Vialoux of Timing the Market CLICK HERE for the Full Monday Report including 43 Charts.
Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments. Don earned his Chartered Market Technician (CMT) designation from the Market Technician Association in 1995. His CMT paper entitled “Seasonality in Canadian Equity Markets” was published in the Spring-Summer 1996 edition of the MTA Journal. Don also has extensive experience with Exchange Traded Funds (also know as Index Participation Units) as well as conservative option strategies. In 1990 he wrote a report that was released in the International Federation of Technical Analyst Journal entitled “Profiting from a Combination of Technical and Fundamental Analysis”. The report introduced ” The Eight Phases of the Stock Market Cycle”, an investment concept that continues to identify profitable entry and exit points for North American equity markets. He is currently a member of the Toronto Society of Fundamental Analyst’s Derivatives Committee. Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.