First, I'd like to wish everyone a Merry Christmas and a Happy New Year!
2018 has been a wild ride with volatility returning to extreme levels. Unfortunately, 2019 looks like it will get even worse. I believe we're in a bear market and, at EarningsBeats.com, we've already made preparations for it. A bear market doesn't have to mean losses in your portfolio. You have options. Sitting in cash increases your buying power when an ultimate bottom forms. Trust me, being in cash while the stock market falls is the second best thing to making money! We will not be satisfied with simply holding cash, however. A bear market presents opportunities too. It just requires a different mindset. Rallies should be shorted. If you only trade on the long side, there will be opportunities there as well, but you'll need to be extremely quick with your trigger finger as rallies, once they're complete, will turn and likely turn very quickly. It also makes sense to trade more defensive stocks on rallies as those stocks tend to hold up much better in a bear market.
Whether you're bullish or bearish heading into 2019, we have the best stocks to consider trading. While trading on the long side or short side can make you money, there's one common denominator with both. In fact, the best and most successful traders exercise this one common trait, no matter the trade.
They manage risk extremely well.
What does that mean? Well, it can mean a lot of different things to a lot of different people. For us at EarningsBeats.com, it means mapping out a trading strategy (entry point, exit point, target) before ever entering the trade.
Let me give you two examples, our last two alerts to members. One is a clear winner, the other an obvious loser. But downside risk is contained in both and that is critical.
The first example is Wright Medical Group (WMGI). The company beat Wall Street estimates as to both revenues ($194 mil vs $186 mil) and EPS (($.09) vs. (.15)). WMGI gapped higher when the opening bell rang. After trading as high as 30.75 on November 8th, it fell back to a major price support level, one that had been tested on at least three prior occasions. There was no guarantee that price support would hold, but that level presented the best reward to risk entry point. It's how we manage risk and produce the risk-adjusted returns that we do. Here's the chart:
We alerted our members to WMGI at 26.49. Our original target was 29.00. You can see a few previous tops just above that 29.00 level. Our stop was (1) a close beneath 26.25 (violating gap support), or (2) an intraday move below 26.00 (violation of all prior intraday lows since August), whichever triggered first. That set up a potential reward of 2.51 to our target or .51 to our intraday stop. That's a 5:1 reward to risk ratio (R2R). If you trade with discipline and patience, these types of trades will present themselves on a regular basis. We ended up removing WMGI at 28.20 on December 7th, with a profit of 6.46%. We removed it early for two primary reasons. First, the overall market was beginning to look more and more bearish so using a market rally to take profits simply made sense. The second reason was.....well look at the red-dotted line on the chart above. 28.20 was testing a downtrend line. We didn't want to risk our 6+% profit that was earned in just 5 days. This trade really encapsulates what we're about. A really good call was made, WMGI rebounded as expected from a desirable price support level and we booked profits. Our trifecta! Since our sell, WMGI has pulled back and a portion of our gain would have been given back had we continued to hold. WMGI remains a solid stock, but there's a reasonable chance it'll retest that price support level again. Why turn your nose up at a 6.46% profit in 5 calendar days? We didn't.
Every trade doesn't work that well and I'm not trying to tell you that they all will. In fact, my second example went against us, so let's look at Nomad Foods Ltd (NOMD). Like WMGI, NOMD produced excellent quarterly results in early November and resulted in a nice gap higher. Both revenues ($617 mil vs $584 mil) and EPS ($.30 vs $.26) easily exceeded expectations and the stock was added to our Strong Earnings ChartList. Then we exercised patience until NOMD moved to a price near major price support. Either we'd see a rebound and capture profits like we did with WMGI....or we'd get stopped out quickly. Here's the chart:
Our buy alert to members was sent on December 11th at 18.55. Our target was set at 20.10, slightly beneath a key price resistance level. Because of volatile market conditions, we decided to establish an INTRADAY stop just below that day's low of 18.42 so we set our stop at 18.40. Friday (December 14th), NOMD opened at 18.40 and we were quickly stopped out at 18.39, representing a 0.86% loss.
Two trades, one winner, one loser. But a significant net profit. Honestly, these last two trades could be the poster child for EarningsBeats.com. It's all about taking your profits before they're lost and managing downside risk.
Getting back to my article headline, please make this New Year's resolution. Manage your risk better. If 2019 turns out to be a bear market, which I believe it will, managing risk will become an even greater priority.
I started this EarningsBeats.com service in October 2013 along with my former partner and current Sr. Technical Analyst at StockCharts.com, Tom Bowley. We produced a service that works and has been time-tested. In a bull market, trading stocks that beat Wall Street estimates has proven to be very profitable. Moving forward, we're going to be looking at shorting stocks that have missed Wall Street estimates. Accordingly, we now have two watch lists as follows:
Strong Earnings ChartList: 227 stocks on list
Weak Earnings ChartList: 67 stocks on list
On Wednesday, December 19th, Tom Bowley will be joining me to conduct a "2019 Stock Market Outlook" webinar just after the market closes. It's a FREE event, but you must register in order to attend. For more information, CLICK HERE. Those attending will have an opportunity to gain access to BOTH of the ChartLists mentioned above. It'll be your first step to more effectively managing your risk in 2019 - I hope to see you there!
This webinar will be at capacity guaranteed! So register now and plan to arrive EARLY (immediately after market closes on Wednesday) to make sure you get a LIVE seat. If you have any questions, please feel free to email me at firstname.lastname@example.org.
At your service,
John Hopkins, President