This Week’s Battle Plan
This week’s game plan was
written by Larry Connors in collaboration with Greg Che.
Two issues will dominate trading over the next
few weeks. The first is earnings. More than half the S&P 500 and Dow
Industrial stocks will be reporting numbers over the next 12 days. The other
issue is whether or not another terrorist attack occurs and the extent of that
attack.
Let’s look at scenarios:Â
Over the past few weeks, those companies who have
missed their quarterly numbers or warned they would miss their numbers led to
little impact on the overall market. This is the first time since early 2000 we
have seen this type of action.Â
Warnings over the past 1 1/2 years have pummeled
the stock prices of those companies who have warned. Big-name stocks who have
warned or missed their numbers have led the market to further declines. This has
not been the case recently.Â
And this is a good sign…a very good sign. And
when companies have recently hit their numbers or beaten the estimates, their
stocks have soared. Another good sign.Â
Make sure you let the market talk to you this
week. When a big company misses their earnings and/or announces a negative
outlook, look at what the market does. Does it get pummeled as it did during
most of this bear market? Or does it do what it is not supposed to do and rise?
If it does rise, it is talking to you very loudly.
The same holds true for acts of terrorism. Let’s
look at Friday’s action. Anthrax news scare…the S&Ps lost 20 points in 20
minutes and the Nasdaq Futures dropped 50 points. Both markets, though, shrugged
off the news and proceeded to rally sharply off their intraday lows. And the
rally went right into the close, with buyers holding stocks into the weekend. A
weekend that was supposed to bring terror to our country. Again, the market
spoke loudly. Another terrorist attack will certainly send the averages lower.
The thing you need to look at is how the market reacts after such a
sell-off.Â
Kevin Haggerty says it best: “Trade what is,
not what should be.” And that rule is your best guide, especially for this
upcoming week.
Trading Research Notes: This
past week, CS First Boston released a study showing the effects of volatility on
stocks which pre-announced worse than expected earnings. They found that before
the news, volatility rose (leaks? Nah!) but the 20 days after the news,
volatility imploded. This is important news for options traders because an edge
goes to those who short premium upon such announcements.
We at TradingMarkets have gone
one step further with this research. We have found that after the negative news
the stock drift (movement) occurred predominantly to the downside when the trend
of the S&P was down (trading below its 200 day MA). In a bull market, the
drift of these stocks tended to be higher (in a bull market there is a tendency
to shrug off bad news).
Therefore, in a bear market,
the selling of call premium was especially profitable and in a bull market the
selling of put premium gained the added edge. Spread trading, as taught by Tony
Saliba in his lesson “Introduction
To Options Spreading” should be of interest to you if you wish to
pursue this further.
Good luck with your trading this week!
Larry Connors and Greg Che
Larry Connors is CEO and co-founder of
TradingMarkets.com. He is co-author with Greg Che of the new book “Trading
Connors VIX Reversals.“