Using A.I. to Trade Earnings Season

By TradeSmith Research Team

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Reckoning with the 2024 election | The labor market’s cooling, not freezing | Another point for an early rate cut | Earnings season is here | Trade it with A.I.…

Those who hoped the market gods would let the good times roll into the new year had another thing coming.

As I write Thursday morning, the S&P 500 is down 0.7% for the year. That’s a rough start. It’s also unusual — back-to-back losses on the first two days of the year have only happened seven times.

But if you ask us here in TradeSmith Daily, it may be another month or more before we settle back into a bullish groove higher.

Why should we be so confident the sun will eventually come out?

Never mind the fact that election years tend to be great for the stock market, with a 11.3% average return from 1928 to 2016 according to Morgan Stanley.

There’s also all this:
  • Consumer sentiment rocketed into year-end, the highest reading since June 2023.
  • The rate of inflation, measured by the Core Personal Consumption Expenditures (PCE) index, is back at the Federal Reserve’s 2% target.
  • That means interest-rate cuts are likely right around the corner, lifting a weight off everyone from homebuyer hopefuls and small businesses… to capital-hungry startups and the struggling long-duration Treasury portfolios at small banks.
  • Remember when I mentioned the back-to-back S&P 500 losses to start the year? On average, stocks rebound to close up 3% in the first quarter after this unique setup.
Yes, there may well be much to look forward to in 2024.

Still, we must be mindful of the beneath-the-headlines risks.

The labor market… a potential deflationary scenario… and a bombastic earnings season are all on the table for the coming weeks and months.

Let’s dig into those today…

❖ It’s election season…

While I personally try to keep politics about as far away from my mind as humanly possible, one cannot deny that a huge impact on investor sentiment — and thus on markets — is on the table come November.

We’ve shown you before how stock markets behave around elections. They rise more than 11% in aggregate, which is great. But depending on which party’s in power and whether the other manages to grab it back, that number can sway in either direction.

I’ll point you to a piece I wrote a couple months back, where we dug deep into these party-driven factors. And here, I’ll share two important takeaways to keep in mind:
  1. Republican victories have coincided with a losing year for the stock market only once — with George W. Bush’s victory in 2000. Democrats, meanwhile, have won the White House during three separate losing stock market years — 1932, 1940, and 2008.
  2. Going back to 1928, the average return in a year with a Republican winner is 15.2%, while a Democrat win is 8.5%.
Market observers will be watching the election carefully as the date draws near, and so should we. If it’s looking like Republicans will win, history says we’ll want to be long stocks and use dips as gifts.

One issue on voters’ minds, which could sway the vote? The labor market.

❖ The labor market is finally cooling off…

The start of 2021 marked the beginning of a wild surge in U.S. hiring activity, with the number of job openings growing from 7 million to 12 million at the peak, according to the Bureau of Labor Statistics.

Once-in-a-generation cheap credit courtesy of a generous Federal Reserve, alongside the work-from-home trend cracking the job market wide open, made it possible.

But times have changed… the cost of credit has changed… work-from-home policies have changed… and the labor market has changed with it.

In November, job openings fell to the lowest level since the 2021 surge. At the same time, people are purposefully leaving their jobs less and less. The “quit rate” is at 2.2%, the lowest rate since 2020. People aren’t so willing to shop around as they were during the hiring boom.

This isn’t to say the labor market is ice cold. There are still 1.4 jobs for every unemployed person in the U.S. — hardly what I’d call an issue. It’s still well above the pre-pandemic highs, which were the highest level of the previous two decades.
A sharp slide downward in this number would be cause for concern — and a potential boon for presidential contenders tapping into populist messaging — but we’re just not there yet.

For now though, this is another sign of the pandemic-era excesses slowly wringing themselves out of the market — precisely the Fed’s objective.

But wait a minute, we’re seeing something in the manufacturing numbers that looks not-so-rosy…

❖ An inarguable sign of economic contraction…

The Institute for Supply Management (ISM) issues a monthly report of its Purchasing Managers Index (PMI) — a survey-based take on the manufacturing side of the economy.

On its 0-100 scale, a reading below 50 indicates economic contraction, while a number above 50shows expansion.

This index is unique in being the single consistent measure of can’t-deny-it contraction for more than a year. Over the past 14 months, the PMI has been below 50 — it’s contracting. The manufacturing sector makes up more than a tenth of the overall economy, which grew by 4.9% in the third quarter last year.

Most interesting in the newest report, though? The price component of the index was down 4.7% from the previous month, indicating a huge decrease in the cost of manufacturing materials.

That’s beyond disinflation (the slowing of inflation) and straight into deflation… or falling price levels.

Falling price levels might sound like a great thing to anyone buying groceries and gas, but it’s a surefire sign of an economy slamming the brakes to the floor.

Understand, the PMI is hardly a guarantee of broader recession. However, couple it with the inverted yield curve we’ve been covering lately… and more signs of deflation in China and Germany… it’s yet another signal that the coming landing may not be so soft.

That may prompt an earlier rate cut than many expect — a mixed bag. Cheaper credit sounds good… but the fact that we’d need it so quickly… not so good.

Cautious optimism is the play here. A recession is as likely to happen as it has been for the past year. The question is how deep it will be and whether the Fed will navigate it well.

As we preach time and again in TradeSmith Daily, focus your capital on quality, efficient businesses trading at cheap valuations. And I’ll append this advice with a suggestion to hold a good chunk of cash in short-term yield instruments to take advantage of any downside to come.

Now, in lighter and related news…

❖ Earnings season is here…

You know who probably doesn’t have recession at the top of mind right now?

The hundreds of public company CEOs about to hop on a call with their investors and report their quarterly earnings numbers.

Yes indeed, earnings season is here. And anyone reading this who calls themselves a trader should be overflowing with excitement.

Earnings reports regularly provide big stock-price moves in either direction – overnight gaps with enough volatility to add zeroes to a position faster than you think.

The heavy hitters don’t report for a couple more weeks. But we do have the big banks reporting a week from today… and Taiwan Semiconductor (TSM) the day before. The latter stock is in a sector that was one of the hottest trades of 2023. And the former is a sector that stands to benefit greatly from imminent interest-rate cuts.

Safe to say, these reports will be fascinating. And if you’re looking to trade them, I have something special you need to see…

❖ Join Landon Swan and a special guest on Tuesday, Jan. 9…

Landon Swan, co-founder of LikeFolio, is one of the most impressive earnings-season traders I’ve ever seen.

And it’s not just about his returns — impressive as they are. (Last season saw returns of 135% on CROX, 23% on SFIX, 80% on DKS, and 86% on DLTR, all in less than five days.)

Really, it’s about how Landon and his brother Andy use A.I. to develop a consistent, systematic strategy and give their subscribers everything they need to succeed.

Followers of their Earnings Season Pass get a weekly report every Sunday, full of the top trade candidates based on several key factors.

These factors are all determined by their custom-made A.I., which scans a continually evolving dataset that most Wall Street traders don’t even think to check.

The A.I. gives each stock a ranking, and the stock with the top ranking is their focus for the week ahead. Along with that ranking comes a number of recommended strategies, across the risk spectrum, to trade it before it reports earnings.

That’s been the Swans’ playbook for the last few years of earnings seasons, and it’s treated their subscribers very well.

Landon’s presenting his newest earnings season research this coming Tuesday, in an exclusive webinar ahead of their first weekly report. And he’ll be joined by a key figure in our network, whose track record for spotting continual earnings winners is second to none.

If you sign up to attend their FREE webinar right here, you’ll have the opportunity to check out a brand-new special report, called “This One Sector is Bursting with Blowout Earnings Opportunities” — their top-ranked sector for this earnings season that Andy and Landon will be watching.

I just read the report, and I can virtually guarantee this niche sector is not at the top of your watchlist.

And stay tuned for a special treat tomorrow — my own exclusive interview with Landon Swan and his brother Andy ahead of Tuesday’s big event.

To your health and wealth,

Michael Salvatore
Michael Salvatore
Editor, TradeSmith Daily