Earnings Season Has Started EXACTLY As I Would Have Expected

Quarterly earnings is a time when management teams announce whether they’ve kept all their promises that were made over the prior 90 days. These quarterly earnings announcements should not be shockers. Wall Street despises big surprises, especially when companies fall short of their consensus estimates. Wall Street firms use future earnings estimates and projected growth rates to help them determine what the inherent values of businesses are. When management teams can’t meet or beat current estimates, how can their future estimates be trusted? And once Wall Street loses trust in management, it’s over. It can take a long, long time to restore that confidence.

I have a “go to” in terms of an earnings indicator and you’ve likely heard me talk about it often. It’s relative strength. Using a school analogy, teachers separate their best students from their worst students using grades. Students that routinely make A’s are considered excellent students, while C students are considered average, and those making F’s are failing, unable to keep up with the better-performing students. The stock market isn’t much different. The big Wall Street firms break down all the companies in a given industry and much of their “grade” for each company is based on expected quarterly earnings and a company’s history of beating estimates. As a trader or investor, we can get clues as to what we might expect from quarterly earnings by how various companies’ stocks trade relate to others within their industry group. In other words, are they the A students or the F students, or somewhere in the middle?

Here are two perfect examples of stocks that just reported this past week, one with excellent relative strength and the other much weaker:

JP Morgan (JPM)

Quarterly revenues: $34.55 billion (actual) vs. $33.95 billion (estimate)Quarterly earnings: $3.57 (actual) vs. $3.11 (estimate)

Simply put, JPM crushed it. And Wall Street was expecting them to crush it. How do I know that? Well, money has been pouring into JPM relative to its banking peers for the past few months. Check this out:

This is absolute textbook TA, in my opinion. JPM was obviously a favorite among the big Wall Street firms, showing tremendous strength, both absolute and relative, from the October low through early December. But note the negative divergence that developed as bullish momentum appeared to be waning. Then, on the first trading day of December, JPM printed a bearish engulfing candle, which is a reversing candlestick. Reversing candlesticks, combined with negative divergences, are signals that I do not ignore. I expect to see PPO centerline “resets” and/or 50-day SMA tests after those bearish technical signals surface. The two pink arrows mark the PPO centerline reset and the 50-day SMA test, ending the 3-week period of profit taking/weakness. Since that time, JPM has resumed its prior uptrend and has a strengthening PPO – very bullish technical behavior. Strengthening PPOs typically result in 20-day EMAs acting as solid support on pullbacks. After JPM’s quarterly results Friday, a “sell on the news” mentality kicked in and banks were very weak Friday morning. JPM fell back initially to test that rising 20-day EMA, then bounced beautifully, closing back at its highest level since February 2022.

Excellent relative strength was the earnings indicator that suggested we’d see solid quarterly earnings and it was wise to listen.

KB Home (KBH)

Quarterly revenues: $1.94 billion (actual) vs. $1.99 billion (estimate)Quarterly earnings: $2.47 (actual) vs. $2.85 (estimate)

Some might say, “how could you see this coming?” Well, one look at relative strength and you’d have to at least consider the possibility that quarterly earnings were not going to be good:

It would be easy to look at the recent price breakout and assume that quarterly earnings would be strong. But I believe KBH is nothing more than a beneficiary of a very strong home construction group ($DJUSHB). Money has rotated strongly into homebuilders and KBH, despite being a relative laggard, has benefited from that inflow. This has been a case of a strong group masking a weak component stock. The relative strength of KBH has been very poor for a long time and this earnings indicator nailed another prediction beautifully as KBH missed on both its revenues and EPS.

I’m hosting a FREE “Q4 Earnings: Sneak Preview” webinar on Monday at 4:30pm ET where I’ll be providing several upcoming earnings predictions based on relative strength. Results from last quarter were fantastic! If you’d like to join me, it only requires a FREE EB Digest newsletter subscription. We’ll be sending out room instructions to all of our EB Digest subscribers on Monday. CLICK HERE to enter your name and email address and join me, if you’re not already an EB Digest subscriber. There is no credit card required and you may unsubscribe at any time.

Happy trading!

Tom