Trading Earnings Season in a Bullish Market

01/16/2013 7:00 am EST

Focus: STOCKS

L.A. Little

Contributing Editor, Minyanville

As the market backs and fills and spends time working off its oversold stretch higher to start the year, it's a good time to try and do a little buying, writes L.A. Little on Minyanville.com.

The market cycles over and over with slight variations. A common occurrence in this cyclical theme is when earnings season comes around at the same time that the market is bullish, and that is what we see currently. The desire is to put on exposure, but the risk of doing so is great. An ill-advised purchase and an earnings disappointment can squash your portfolio. In general, the upside earnings reward is limited when compared to the downside, so do you really want to play Russian Roulette?

To get that added exposure, one can turn to sector buys to spread the risk. Another tried-and-true method is to pick off stocks that have already reported and stretched higher and are now retracing off that earnings pop. Since not all companies report at the same time, that opportunity does exist. Take Adobe Systems (ADBE), for example. This company reported back in the middle of December and spiked higher as a result.

chart
Source: Investools.com
Click to Enlarge

Such a spike is a pretty good clue that investors are willing and wanting to buy this stock when it retraces back to the breakout area and that is what happened at the tail end of the month as price dipped back to the $37 area. From there, price pushed higher when the general market took off to start the year. But now, we are seeing the second fade back to the top of the breakout bar from December 14, 2012, and that isn’t a bad place to add more (or initial) exposure if you are looking to beef up your portfolio a bit.

Of course, you need a stock that is strong across all time frames and the Trading Cube shows this to be true not only of Adobe (ADBE), but also true of the sector it trades in.

chart
Source: Investools.com
Click to Enlarge

As the market backs and fills and spends time working off its oversold stretch higher to start the year, it’s a good time to try and do a little buying. The problem is you don’t want to buy in front of earnings but instead afterwards. So take a look back to those companies that have already reported and saw those earnings bought. They are the stocks to pick at as they retrace. If the market does work its way higher, these companies will participate. That is a solid way to get exposure without taking the huge risks of an earnings bomb.

By LA Little, Contributor, Minyanville.com

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