The Daily Breakdown takes a closer look at how the stock market is trading vs. the news it’s receiving. Plus, a technical look at Walmart.
Friday’s TLDR
- Interpreting price action
- Walmart dips to possible support
The Bottom Line + Daily Breakdown
I want you to think back to February 12th when we had the hotter-than-expected inflation report (the CPI print). That was bad news for most investors. So were all the tariff talks. So were the disappointing Magnificent 7 earnings, where five of the six companies that had reported were lower than their pre-earnings closing prices.
And yet the markets weren’t breaking down. Instead, they were showing resilience.
That prompted us to write this the next day (on the 13th): “All that to say this: Markets handled yesterday’s bad news pretty well — and that’s a good thing.”
Price Action Trumps the Headlines
How many times have you seen a stock fall despite good news? Conversely, how many times have you seen stocks rally in the face of bad news?
It’s one of the more interesting phenomenons on Wall Street, as price action has the ability to defy expectations. So many things play into this type of reaction, but it’s mainly driven by sentiment and forward-looking expectations.
Wall Street cares more about what a company is going to do in the future (typically over the next 6 to 18 months) and less about what it has done (like in the past few months). Zooming out to the market as a whole paints a similar picture: It’s about what the environment looks like going forward vs. what it looks like in this exact moment — and especially vs. what it looks like in the past.
This can become exacerbated when sentiment gets too one-sided. If too many investors are bearish, markets actually have a tendency to rally. The opposite tends to be true too — when seemingly everyone is bullish, stocks have a tendency to dip.
Put another way, when too many people move to one side of the boat, the keel often drags it back in the other direction.
The Bottom Line
When stocks rallied in the face of that hot CPI print last week, it was the market’s way of telling us something: It was rallying despite a barrage of negative headlines. That’s bullish price action. After that, it didn’t take long for the S&P 500 to make new record highs.
In a similar vein, falling stock prices would be a concerningly bearish sign in the face of good news and when seemingly everything is going well.
Active investors should pay attention to price action, because it’s often the reaction to the news that matters more than the news itself.
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The setup — Walmart
Walmart is a great example of how markets tend to be forward-looking.
The stock was under pressure on Thursday morning despite beating on earnings and revenue expectations. The company even increased its dividend by 13%.
However, management provided disappointing earnings guidance, saying they expect earnings in the range of $2.50 to $2.60 per share, which was below estimates of $2.76 a share.
Now the stock is pulling back to an interesting area near $95.
This stock has been on a tear, but is now having some of the wind taken out of its sails. Investors should see how WMT reacts to the $95 area, which is a prior breakout area. The 50-day moving average also comes into play near this mark.
If this zone acts as support, it’s possible that Walmart stock could bounce and recover some of Thursday’s losses. However, if support fails to materialize, more bearish momentum could ensue.
Options
Buying calls or call spreads may be one way to take advantage of a pullback. For call buyers, it may be advantageous to have adequate time until the option’s expiration.
For those that aren’t feeling so bullish or who are looking for a deeper pullback, puts or put spreads could be one way to take advantage.
To learn more about options, consider visiting the eToro Academy.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.