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Earnings season kicks into high gear this week.
This is the week that puts most traders to bed early each night, with almost 500 companies releasing their earnings results between Monday morning and Friday night.
it’s an investing feat of strength – and many are already getting started.
Buyers dove head-first into stocks ahead of earnings announcements last week… only to see those reports trigger a “sell-the-rumor rout.”
I’m here to tell you one thing – don’t follow those buyers. One of our three steps to straight-up profits is this:
Avoid the crowd.
Investors are piling into three big names in particular ahead of their earnings reports. But each of these stocks look ready to correct by about 5-10% – and I don’t want you to be there, losing money when that happens.
That’s why you’ll want to avoid these three stocks at all costs this week…
Apple Inc. (Nasdaq:AAPL), Facebook Inc. (Nasdaq:FB), and D.R. Horton Inc. (NYSE:DHI) all report earnings this week. But based on the following charts, each look ready to break their upward trend.
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Given that activity, I would recommend taking these reports in as spectators
– not investors. Instead, save your money and buy the stocks later next week.
But while you should avoid AAPL, DHI, and FB as investors, that doesn’t mean you should stay out of this week as traders. Remember the difference between the two?
This is Q4 earnings’ biggest week, and it’s set to be a volatile one. But volatility is a trader’s best friend. Sure, I’ve been telling you that the market is due for a pullback, but it’s not likely to happen this week. Remember, bull markets climb up the “Wall of Worry…” and they slide down the Slope of Hope.
This week, we’re climbing the Wall of Worry.
As I was doing my reading this week, I came across a great article in the Wall Street Journal. “If It Looks Like a Bubble and Swims Like a Bubble…” The headline immediately grabbed me, and frankly, so did the article.
The author’s points sounded familiar. A few of them were ones I’ve made myself over the past few weeks. Stocks need to make a 10-15% correction – but it’s not likely to happen this week. That article, by itself, represents a single brick in the Wall of Worry, and I found many more just like it as I made my way through the mainstream market media outlets this week.
Concerns about the Robinhood investors moving away from the platform, leaving the market high-and-dry for speculative traders…
Articles about how we’ve got a fresh number of IPOs and secondary offerings coming to the market over the next month…
And of course, the stories about how the dollar is going to start shooting lower again with a new Central Bank Sheriff in town.
Each of these are a brick in the Wall of Worry. Bull markets climb the wall of Worry and slide down the Slope of Hope – meaning we’re heading higher this week.
The complaints we’re seeing right now are the same ones we saw six months ago. Sure, we got a quick 9% correction in stocks in September and then another 8% pullback in October, but those were just drops that got those “buy the dippers” excited about grabbing some of those otherwise overvalued stocks. And it worked, in both cases, as the market took right back off to new highs.
Now, I’m not telling you that this is the time to go buy anything. It’s not.
Last week’s post-earnings performance from Intel Corp. (Nasdaq:INTC) and International Business Machines Corp. (NYSE:IBM) should be telling you that. But the list of stocks that are going to continue their bullish trek higher is still much longer than those that are truly heading into troubled times.
So, for all the reading that I did over the weekend, I still come to one indicator to watch: the CBOE Volatility Index ($VIX) – and one simple level – 20.
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January is often the beginning of the market’s first seasonal correction of the year, and the VIX is almost always a day or two ahead of the beginning of that correction.
We’ve been trading around the 22-25 range for the last week, with the trend continuing to favor lower readings. Believe it or not, this simple trend in the VIX is telling us that we’ve got at least another week before things start to turn.
Here’s your rule: raise 20% cash in your accounts the next time the VIX hits 20. It’s that easy. After we hit that mark, I’ll tell you what to do next. But write that down to keep something important in view.
Now, let’s look at three sectors full of opportunity…
But first, one that isn’t. The Financial Select Sector SPDR Fund (NYSEarca:XLF) shares are already breaking through their 20-day moving average on their way to another 5% decline.
As I’ve said before, the financials are the most reliable sell-the-news sector out there, and most of their earning hit the tape last week. We’ll circle back when there is an opportunity to buy these companies, but it’s not now.
Instead, check out these two sectors…
- Materials Select Sector SPDR Fund (NYSEarca:XLB)
This sector has been the sleeping giant for years. It turned in a strong return of 30% for 2020. Of course, most of that was made in the last quarter after the election results, which brings us to why this sector is getting ready to heat up again…
XLB shares just traded down to their 20-day moving average over the last week as traders started taking profits from these companies. The group has posted 20% gains since the election as traders like me have been positioning for an infrastructure rebuild that will send steel, cement, chemical, and heavy machinery companies into a stronger bull market in 2021.
If you missed XLB’s post-election rally, it may be time to start boarding this bullish train. My charts are forecasting another 20-25% run in these names over the next 3-4 months.
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- SPDR S&P Oil & Gas Exploration & Production ETF (NYSEarca:XOP)
Another sector benefitting from the 2021 rebuild and recovery rally is oil and gas.
While clean energy is the more attractive sector – with better returns and more volatility – the “old school” energy companies are ramping up production and activity as global demand and commodity prices are on the rise.
XOP shares just made a nice 10% correction after a 70% post-election rally. The kicker is that the analyst community and traders are only now getting involved with this trend change, which tells me the next rally should be just as strong, or even stronger.
Consider the current price of $64 as a good entry for those that have been looking to get into the oil trade with a target of $80 over the next quarter.
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I’ll be back on Wednesday with three earnings trades as well as our weekly review of one of my data filters and a few more hot stocks.
Until then, best trading success,