The bears were awakened last week following Fed Chair Powell's remarks, as well as Trump's trade war tweets. Both events brought the markets to their knees, with each of the major indices pulling back to their 50-day moving averages.
Despite the negative action in the broader markets, there was, beneath the surface, a subset of stocks that gapped up higher, with many on heavy volume. In fact, over 180 stocks sprung to life, which took place after they reported strong earnings reports. This figure represents approximately 1/3rd of those that reported last week.
And some of the gains were huge! My biweekly MEM Edge Report - available to investors - has seen 6 of its Recommended Holdings stocks gap up an average 7.1%. The refined list of 25 top-performing stocks on this report is designed to uncover big winners and, despite the general downturn in the markets, it revealed plenty of opportunities.
While many investors will sell their stocks after a big pop in price, this approach can oftentimes be shortsighted and the stock will go on to move much higher. Of course, you need to have a healthy market as your backdrop. With that in mind, let's review some of the dynamics that will propel a stock higher following a strong earnings report.
DAILY CHART OF COUPA SOFTWARE (COUP)
Above is a chart of Coupa Software (COUP), which has been a big winner this year. The company reported strong Q4 earnings at the end of January, which resulted in an 8% gap up in price. The green arrows on the chart are highlighting analysts' upgrades and/or price target increases.
This is common among these winning stocks, as analysts are now interested in this strong grower and are turning bullish as they uncover sound fundamental information that will support continued growth of earnings. This, in turn, will spur further bullish sentiment and help propel the stock higher.
Other dynamics are at play here as well. For instance, Coupa Software is in one of the strongest areas of the market, with Software stocks up almost 40% year-to-date prior to this week's selloff. Industry Group affiliation accounts for a large portion of your stock's upside (or downside) potential, so make sure you're trolling in areas that have products or services that are in high demand.
Most importantly, you'll need to pay attention to the chart. If the stock breaks out of a base while gapping up on volume (as seen above), this is very bullish. Beyond that, the stock will need to find continued support at its upward-trending simple moving averages while it continues to advance.
DAILY CHART OF CHIPOTLE (CMG)
Chipotle (CMG) - which I highlighted 2 weeks ago as looking bullish going into its earnings report - could be a winning candidate after gapping up last week following the release of strong earnings. The stock advanced further this week in a very difficult period after Goldman Sachs upgraded the stock. Add in the fact that CMG is finding support at its upward-trending 10-day moving average (green line), this stock could easily continue to outperform.
Next week, I'll highlight how to trade these stocks following their gaps up in earnings – something my newsletter subscribers will read about this weekend – so be on the lookout for that. For those who'd like to receive my articles directly, you can sign up using the Contact Us link here.
Mary Ellen McGonagle