stocks

Q2 Earnings: Volatility Incoming

In January, I told you to rebalance to reduce equities. In March, I told you to rebalance to get longer equities. Today I’m telling you to make sure you rebalance again. Q2 Earnings Season is likely to cause a lot of volatility.

Why? Because analysts and the market really have no idea what earnings are going to be.

Here’s a chart showing the expected change in earnings over time from Factset Insight.

While you may look at the total lack of change since May as evidence we know EXACTLY what is going to happen, it’s really the opposite!

Most firms pulled guidance for the year. So analysts have nothing to go on. That will make earnings even more volatile than normal.

Given the market is close to all time highs, I think the “whisper” earnings expectations may be a little high for the rest of 2020 and 2021, which could led to a pullback. Especially in names with nosebleed valuations.

By Christopher Schwarz, ago

“This is Wall Street. We will Take Your Money.”

That is one of my favorite quotes from The Big Short. Right now, that is happening to a lot of Robinhood traders. This article discusses someone who borrowed $45,000 from his house and credit cards and pretty much lost it all.

Robinhood users are making the classic “past returns predict future performance” mistake.

Here’s an example. This is Gap Inc. (Ticker GPS). On June 26th, it was announced that Kanye West’s clothes would be sold at the Gap. (I assume they say “Kanye 2020” on them.)

This graph has the share price and change in the number of Robinhood positions by hour.

Gap Inc. quickly rose almost 30% on the news. You can see how Robinhood uses that “play the game” during the day immediately started buying.

The next morning, there was a HUGE surge in buying. (This is typical – most RH trades are at the open. You can see the spike almost every morning.) I assume many Robinhood users look at things at night and put in buy orders for the open. That probably causes price pressure.

Finally interest died and now all of those new owners – 700% higher than before the news broke – are probably sitting on loses of approximately $8 million if I assume trades of 100 shares per trade.

Bottom line: Buying after a huge gain like this is almost a losing proposition. However, it’s how RH users like to play the game. And now they are paying for it.

By Christopher Schwarz, ago