Microsoft Had A 'Key Reversal' After Smashing Earnings, Take Profits, Trim Positions

by: David H. Lerner

Microsoft is arguably the world's best stock. After smashing its report, the stock displayed a key reversal on double the average volume, and the highest in July made me sit up and take notice.

To avoid another Netflix, we have to reassert our discipline going into earnings and trim our positions. Earnings season has the most beta of each quarter and the best opportunity to generate alpha or protect against losses.

Just remember CASH is the cheapest hedge.

I published a list of names reporting this week that interest me and I have referred to over the last few weeks. DO NOT be surprised that a company you own is reporting this week. Know what you own and have a strategy going into earnings.

Biggest Stock in the World Recorded Great Growth in Revenue and Earnings, So What's the Worry?

Microsoft (NASDAQ:MSFT) is one trillion dollars by market cap. It's a stock you could feel safe recommending to your mom. It's got a dividend that is sure to grow and an unassailable business model with a glide path of a decade of great growth ahead. It beat earnings and revenue by about a billion dollars, and it made almost $34 billion this quarter. There are plenty of countries with a way smaller GDP. Microsoft opened at all-time highs and should have closed at the high. There was no "hair" on the report. MSFT is firing on all cylinders. Instead, it had a "Key Reversal," a red flag for technicians. When the overall market behaves this way, and certainly when arguably the best stock in the stock market behaves this way, we sit up and take notice.

What's a "Key Reversal"?

Well, Mr. Google says: "A key reversal day occurs when: In an uptrend - prices hit a new high and then close near the previous day's lows" (thanks whoever you are). Ok, so Mr. Softie opens at an all-time high and then closes on the low for the day. Big deal, who cares. First of all, it may not be a big deal. I see my job first and foremost is trying to figure out where we are going in the market. Are we going to continue this march up, is this a little pause that we had this past week, described breathlessly by the financial media as "the worst week in the markets since May!" or are we going to have a more substantial drop now? I am not afraid of leading with my chin and being wrong if I can get you all prepared for the moment when the market really does drop. Because, if you can come into a sell-off, by definition (in my book), it means stocks are on sale and you are prepared with cash to spend you will beat the market and everyone else. Market timing something people (mostly the ones too chicken to try) say can't be done, yet it is how you get outsized returns.

Microsoft is what I call one of the "Generals", the kind of General that leads from the front, and when it gets wounded, it can be bad. What really got my attention was that the Key Reversal happened on double the average volume. People were selling Microsoft with conviction on a Friday in July. Who sells stock on a Friday at the highest volume of the month, just before they ship off to the Hamptons? Earlier this week, I said there are no clouds on the horizon, and that made me uncomfortable. Well, now the market is giving us a message, and that message at the least is we are fully valued. Even with the best of the best of the best, it's time to get prepared for lower or maybe we chop around here. Did you see Amazon (NASDAQ:AMZN) this week? It went near its old highs after a fantastic "Prime Day," then promptly sold off. That is not the sign of a bull market looking to make new highs.

The market is looking for a pause here, and any excuse to sell off. Maybe, at the end of this month, when Powell gives the cut and hints that it's "one and done". I still think it's nuts that he's gonna cut, but he hasn't walked it back so we get the 25 bps cut. The market will demand more and more cuts and has a tantrum if it doesn't get that, so the market is telling us that. Microsoft will probably reward my caution by continuing its march back to higher highs, and I will have egg on my face. Still, consider yourself warned. Please take some profits, and trim positions.

When I say take some profits, that does not mean sell everything. It means sell down enough shares so that you have taken out the profits you've made. Trimming means sell 3-5% of a position, especially losing positions. If the message is that we are fully valued right now, then that is probably the best price you are going to get for a loser. It's time to stop being sentimental, stocks are not your "home team" or favorite politician and you are not a "fan", and it is not your girl or boyfriend. You are not being disloyal by taking a profit or especially a loss. Traders trade. I am talking to traders and speculators.

Of course, you shouldn't sell Microsoft here if you are an investor. You are owning the best property there is. It's like owning "Boardwalk and Park Place" in monopoly. That is not what I am saying. This is not the crash or the "big one". I don't even see a 5% to 7% dip as I did in the beginning of June. That doesn't mean it can't happen. Also if the market is just chopping around (because the narrative is, this is as good as it gets), it means that it will display some irrationality and that we can pick up some good names that spontaneously sell-off just because. Finally, this is not a pronouncement that "this is as good as it gets" permanently. Q2 can have better earnings than expected, and with the bar so low, that is what I am expecting. Or the market reads through Q2, and even Q3, and sees renewed growth for Q4 and confounding all the experts accelerated growth for 2020. I am hearing reports that China is crying uncle, so that might just happen.

Preparing for the Bad and the Irrational is No Cause for Panic, as Long as You Have Some Cash in that Wallet

I will repeat this until the message is received. Cash is the best and cheapest hedge. All you are giving up is the opportunity cost. That opportunity cost is temporary because I mean for you to deploy it in the next sell-off. There are other ways to hedge, for instance. Recall that I made note that the VIX was under 13 two weeks ago. I believe it went under 12.50. The VIX closed at 14.45 this Friday. The "Implied Volatility" is getting fat. Write some calls against your spec positions. There are other ways to hedge your portfolio for the end of the month that should not be that costly, and again, consider it insurance. You could have gone long the "VIX" with a call spread. If you don't understand what that is, you are probably better off not trying it. If you are going to hedge, there are a lot of ways to do it. Please get trained up before you attempt using options hedges like shorting calls or puts. Know the difference between a "Collar" and a "Strangle."

So Let's Look at the Earnings Calendar and See Who Might be the Next Microsoft or Netflix


  • BMO = Before Market Opens
  • AMC = After Market Closes

July 22

Nada, not a single company that interests me. Yeah, you got Whirlpool (NYSE:WHR), Celanese (NYSE:CE) AMC. And Halliburton (NYSE:HAL) BMO. Big whup.

July 23

AutoNation (NYSE:AN) BMO. I want to see how strong the consumer is in the auto space. If AN has a strong number, that's a read-through for a lot of things. The new Corvette might just create a lot of excitement for GM (NYSE:GM). More cars sold means higher GDP for Q2.

JetBlue (NASDAQ:JBLU) BMO. I conjectured that JBLU will surprise to the upside after UAL and DAL did so well. JBLU is an all-Airbus airline so it shouldn't be constrained by the Max issue. I rarely recommend going all-in on an earnings report, so this is against my discipline. Please don't make this a heavy bet. The best way is to use options, but be rational about it. Most analysts are not all that high on this airline (see what I did there?). A $19 call is like $.60 for an August exp. Remember that an option at that near a date loses value very quickly if it doesn't go your way. So make believe you took the family out to dinner. If you did buy shares, then use options to hedge, or if you have some alpha, reduce.

Centene (NYSE:CNC) BMO. I recommended this name along with ANTM and UNH. I think it's a good counter-weight to the tech names, and if there's a sell-off, names like this will be a safe haven.

Iridium (NASDAQ:IRDM) BMO. IRDM is a long-term speculation for me. If you like the space economy, IRDM is an OG. It will be throwing off a ton of cash now that its constellation of satellites is in orbit. You hear about Musk wanting to launch 3,500 satellites, and OneWeb doing something similar. IRDM has the corporate DNA to get the most out of a satellite fleet. Forget about space tourism, the real money will be in services run in the Sky Net (terminator reference on purpose). I like IRDM, and if it sells off, you should like it, too.

Lockheed Martin (NYSE:LMT) BMO.

United Technologies (NYSE:UTX) BMO. Interesting because of the merger with Raytheon (NYSE:RTN) and what that means. Also, it still has a bunch of industrials like Otis and Carrier. I want to hear about the larger economy. Otis sells tons of elevators and escalators to China. How bad are the sales?

Edwards Lifesciences (NYSE:EW) AMC. EW is one of my Medtech names. I expect it to knock it out of the park. That said if you own it, maybe trim a tiny bit going into earnings?

Snap Inc. (NYSE:SNAP) AMC. I expect great things from SNAP. However, this is a high beta name. Reduce and/or hedge going into earnings.

Visa (NYSE:V) AMC. This is everyone's darling, and I expect it to smash earnings and revenue since the consumer is so strong. Maybe it's all already in the name. V isn't a classic tech stock; it's more of a Fintech. In any case, you should trim, take profits or otherwise hedge this name just in case. I wonder if it has a hiccup like MSFT.

July 24

AT&T (NYSE:T) BMO. Interested to hear about any color on HBO. Did it gain subscribers? If it did, it would renew talk that Netflix (NASDAQ:NFLX) is "TOAST" and pressure it. I would love that since I am looking to get us long in NFLX at a nice discount. Also, any news about 5G implementation should be interesting. I am a skeptic that it will be embraced as quickly as everyone is talking it up. If it is embraced as fast as advertised, then it will be a new player with a new business model that does it.

Anthem (NYSE:ANTM) another name that I think should do better, along with UNH and CNC.

Spirit Airlines (NYSE:SAVE) AMC. I hate spirit as a dissatisfied customer, and that is all I have to say about this name.

Boeing (NYSE:BA) BMO. It already pre-announced the loss it was taking. The company also barely addressed that it will be flying the Max by Q4. I expect it to confirm current production at 42, but give more granularity on raising production. How will it do that? By announcing that the Max has all of the software modifications tested, all changes accepted by the FAA and it will be ready to fly with a date certain. Probably domestic only while the rest of the world grapples with its own domestic politics. So I am thinking that BA does well in this earnings report. It closed the week at 377ish; your downside is 350.

If you bought it at the 350 level last week, maybe you want to take some profits before the report. You can always buy back in. I don't see this as a potential NFLX. I do see some nice upside if it does have good news for us. So keep an eye on this name. If it goes substantially higher Monday and Tuesday, the prudent thing to do is to hedge or take some profits. If you are a long-term investor, hope that it does fall back to 350, so you can buy more shares.

Boston Scientific (NYSE:BSX) BMO. Not on my Medtech list, but an interesting company nonetheless. I want to see what it is up to and maybe add it to our list.

General Dynamics (NYSE:GD) BMO. I am only interested in it because of its executive jet business. GD makes some of the best equipment out there. Nothing says business confidence more than some shiny new executive jets. It may report badly because of China, but I am interested in hearing about the rest of the world. Textron (NYSE:TXT) was a disappointment; it has a lot of smaller planes though.

Thermo Fisher (NYSE:TMO) BMO. This is one of our Medtech names. Though I don't consider it a high beta on the earnings type name, discipline dictates reducing into earnings. I don't recall specifically saying to buy this name, so I don't have a price target on it. If it rises into earnings, you should consider taking profits in any case. I did call for accumulating Illumina (NASDAQ:ILMN), and if TMO does well without any negative surprises, I expect ILMN to go lower as portfolio managers dump ILMN for TMO, giving us an opportunity to build up our position in it. If TMO falls down hard, it still might affect the price of ILMN as it might bring out some analysts to dump the group.

Facebook (NASDAQ:FB) AMC. This is truly a binary event. It will likely report super smashing earnings, but at the same time tout all the money it is spending on fighting the Russians. My gut says it does very well and the stock goes higher. My discipline says reduce. Hedge this name going in. Trim off a few shares at the very least.

PayPal (NASDAQ:PYPL) AMC. This is a great name. I have been a bull for years. If it rises into earnings consider taking profits or writing some calls to cover your shares. Again, please get trained up before you attempt using options hedges like shorting calls or puts, know the difference between a "Collar" and a "Strangle" or other strategies.

Tesla (NASDAQ:TSLA) AMC. TSLA is the king of high-beta. Those of you who went long at $180-190 and haven't taken any profits, you are now in the realm of the porcine. I did reiterate a buy at $220 and $230 also more recently on July 16, I reiterated a buy at $250, but that must be a "fast money" trade. So you need to sell that on the day. My heart says there is still plenty of upside here. I bet that the week is good to TSLA and it runs into earnings, let's say, to $270 to $280. Isn't that enough?

I suspect it will have news that Shanghai is going to be operational as soon as the end of Q3, and most importantly, it will report positive earnings. How positive? I have no idea. If there is no loss, one could argue that that is still a win. It can credibly say it doesn't need to raise money and then promptly raise another $6 billion, and it will be oversubscribed to boot. My question is, as a trader, how much is enough? If I am right and TSLA is at $270ish to $280 going into earnings, maybe you have $320 as the next point of resistance? If it does announce another capital raise or reports a loss or it really doesn't report much of a profit, maybe the market doesn't like that and we are down below $200 in a hurry. If you were without profits and you wanted to take a flyer, great, but we made out like champs, maybe it's time to call it a day.

ServiceNow (NYSE:NOW) AMC. Another name I've been a long-term bull in. I would say the same as PYPL; reduce, take profits, and hedge if you know how to.

Xilinx (NASDAQ:XLNX) AMC. Another name that we recently got more positive on. If the murmurings this weekend are true, then the China deal might be moving along. This will help XLNX and the other chip names. That said we need to maintain our discipline. Though if we rally into the week, there will be some profit in XLNX to scalp.

United Parcel Service (NYSE:UPS) BMO. We are behind FedEx (NYSE:FDX). If UPS does well, that should help FDX. It will be helpful to see how UPS does with its earnings so we can get a feel for the economy.

July 25

3M (NYSE:MMM) BMO. This is a long-term investment featured in my "So Bad It's Good" email this week. It would be great if it had more clarity on the groundwater pollution issue. I would like to see real business improvement, but as I said in my earlier note, MMM is a fat target for activists.

Amazon (AMZN) AMC. I would treat AMZN like the other high-beta names and reduce, trim, take profits going into earnings. I sense a similar reaction to MSFT, and if AMZN turns up the expenditure spigot, the market won't like that one bit. On the other side, Prime Day was a super smash. AWS will likely blow the doors off of everyone. So I am still a bull. Hey, what happens if MSFT Azure does better than AWS, that could create a sell-off.

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) AMC. The support on GOOGL is $1,050. It has some good stuff to report on. It would be great if it finally paid out some of that good green cash it is sitting on in dividends. I expect good things for Google Cloud. Gartner upgraded it in its Magic Quadrant (whoopee). Honestly, the company has a great infrastructure for advanced applications like machine learning. If you've been following the news, Peter Thiel accused the company of treason because it refused to work on Project Maven for defense. It has the goods, unlike Watson (don't get me started). So my discipline says reduce, so trim a little. I just don't see a whoosh down like NFLX.

Intel (NASDAQ:INTC) AMC. I am not a believer. Both AMD and NVDA will continue to eat its lunch. INTC should rue the day it rand Brian Krzanich off. It will not fix its problems by having a CFO as the CEO. If there is any improvement in its technical landscape, I will be shocked. Long AMD and NVDA; avoid INTC.

Cypress Semi (NASDAQ:CY) AMC. I want to hear about the chip industry. Others like Taiwan Semi (NYSE:TSM) and Micron (NASDAQ:MU) have talked about the turn. Would love to hear more confirmation on that.

Expedia (NASDAQ:EXPE) AMC. I recommended Booking Holdings (NASDAQ:BKNG). I would have gotten behind EXPE too, but it was too close to all-time highs. If it reports well, it will a read-through to our BKNG recommendation.

LendingTree (NASDAQ:TREE) AMC. I was a bull earlier and then got shaken out of the name. I only hope it sells off significantly for a temporary reason so I can get behind this name again.

July 26

Phillips 66 (NYSE:PSX) BMO. I recommended this name based on insider buying in the industry, good crack spreads, and the huge South Philadelphia fire. I expect good earnings. It gives a very nice 3.6% dividend. This is more of a long-term investor name. However, it might just surprise on the upside. If it doesn't, you still have that dividend as a consolation.

Twitter (NYSE:TWTR) BMO. Same as the other high beta names. Trim it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.