Buckle up.
Because this earnings week is unlike any that we’ve seen in a long time.
We’re awaiting reports from Apple, Alphabet, Microsoft, Amazon, and Facebook.
And yesterday, we received a surprising recap from Tesla (TSLA).
What do the companies listed above have in common?
They’ve all been driving the momentum of the S&P 500 for months.
These six companies have a combined market capitalization of more than $9 trillion.
That figure is one-tenth of the entire universe of 4,840 publicly traded stocks on U.S. exchanges, according to CompaniesMarketCap.com.
We’ll see what happens over the next 72 hours.
We could see a lot of panic in the market.
Or we might see a frenzy of buying activity.
The question is what you should be doing… right now.
And I want to share some insight that I assure you doesn’t exist anywhere else.
Mind Your Behavior
Yesterday, we discussed the cognitive bias known as overconfidence.
It’s rooted in the belief that we’re better at picking stocks than the universe of money managers, machines, algorithms, and the rest of our competition.
As I noted, even money managers are overconfident.
Roughly 74% of money managers believe they are “above average” at their job compared to the average analyst.
One of the key points that I made in yesterday’s TradeSmith Daily is that overconfidence fuels additional errors in bias.
Specifically, it can lead to people trying to time the market, over-trading, and blaming outside influence when they are wrong.
According to the historical data, this is important because all three of these factors lead to underperformance.
Today offered a valuable lesson in handling earnings and controlling emotions at this critical time of the year.
Talking Tesla
This week’s earning calendar is essential.
Price momentum in the S&P 500 has broadly been defined in recent weeks by the mega-cap stocks that report this week.
There are concerns that underperformance or profit-taking could fuel a sell-off this week.
Given that these companies compose such a large part of the S&P 500 and the Nasdaq, the indexes could fall quickly. For example, Apple and Microsoft represent 11% of the S&P 500, while they compose 21% of the weight on the Nasdaq 100.
That’s just a reflection of how big these companies are and their impact on the headline numbers that you might see scrolling on the bottom of the CNBC screen.
Many investors will see a 3% or 4% drop in a stock or an index, and they’ll rush to sell immediately.
That appeared to be happening today with TSLA.
On Monday, Tesla easily beat its profit and revenue expectations for the first quarter. In addition to selling a lot of Bitcoin at a profit, the firm reported record vehicle deliveries. The report wasn’t earth-shattering, but there wasn’t any bad news, either.
However, it set off a battle among Wall Street analysts who push to get their names in the newspaper with bold price predictions.
Some analysts believe that Tesla is overvalued at today’s price of about $708.
Analysts at GLJ Research and J.P. Morgan set price targets of $67.00 and $155.00, respectively, after Tesla’s earnings report. Those expectations represent respective declines of about 91% and 79% from Tuesday’s prices, to put those figures into perspective.
Meanwhile, others believe Tesla is a global energy and automotive powerhouse that will redefine the entire world one day.
Bullish analysts offered much higher price targets. An analyst at Piper Sandler projected a 62% jump to $1,200 per share, while two additional analysts set targets north of $1,000.
What should long-term investors believe?
Well, they should listen to what TradeSmith’s tools say.
Tesla Shares Fell, Now What?
Tesla shares fell by 4% in early trading on Tuesday.
It appeared that retail investors saw Monday’s post-market drop and followed many investors out of the market.
We’ve talked about overconfidence, and tomorrow we’re talking about loss aversion, a bias that can make people sell out of stocks because they are more afraid to lose than they are excited to win.
It’s possible that a few investors are selling their shares in reaction to several of the bearish price targets offered by Wall Street analysts.
A projected 90% drop – as GLJ Research predicts – is scary.
Most people would rather avoid losing that 90% than stay in the market to obtain that 62% price target offered by another research house.
This is why trailing stops and the algorithms at TradeSmith are so critical.
All of these price targets and headlines are just noise.
TradeSmith shows that Tesla is still squarely in the Green Zone despite this small drop on Tuesday.
The stock has also been in an uptrend for the better part of the year. If you’re a TSLA investor who has experienced a significant gain over the last 12 months, I recommend using trailing stops to protect your principal and gains.
These tools are designed to help you better navigate volatile, noisy times like this week.
We’ll talk more about ways to tame loss aversion bias on Wednesday.
