Options Trading: Earnings Power Bull Markets

Posted On April 16, 2018 2:07 pm
By: Steve Smith

The pattern is likely to play out again in coming weeks, Goldman Sachs strategists led by David Kostin said, warning that the downside risk for misses will be “substantial.”

“Positive 1Q surprises would confirm investors’ existing confidence in corporate fundamentals,” the strategists wrote in a recent note. “However, if 1Q results disappoint, fears about decelerating economic activity will compound mounting concerns around trade, regulation, and stretched positioning.”

Wall Street analysts are rushing to cut their forecasts for share prices just days before the start of first-quarter earnings season. Total downgrades on price targets for S&P 500 companies exceeded upgrades by almost 200 over the past week, the most since early 2016, data compiled by Sundial Capital Research and Bloomberg show.

It’s a drastic turnaround from January, when analyst optimism over their stocks’ 12-month outlook hit a record high. Back then, price targets were boosted along with an unprecedented stretch of earnings upgrades that were driven by tax cuts. Now, profit estimates have showed no signs of worsening, but analysts are turning sour on stock prices.

Is it a bad omen? Sundial looked at past instances when analyst sentiment deteriorated and found that such outbursts of bearishness actually boded well for equities. Since Bloomberg began tracking the data in 2010, the spread between price-target upgrades and downgrades dipped below -150 five times. On all but one occasion, the S&P 500 rose two months later, posting a median return of 6 percent.

“The message from Wall Street is a positive one for stocks, mostly because analysts have become so apathetic about prospects for earnings season,” said Jason Goepfert, president of Minneapolis-based Sundial.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.