Considering the roller-coaster ride stocks have been on for the past several weeks, you can hardly blame investors for wanting a calming influence.
Lucky for them, they’re about to get just that in the form of corporate earnings season, at least according to firms across Wall Street.
A big part of that support stems from what JPMorgan and Deutsche Bank see as latent demand from systematic trading — which includes the types of passive and often price-insensitive strategies that can wield great influence over the entire market.
The two firms note that commodity trading advisers are running low equity allocations at the moment. This is because the turbulence that rocked markets earlier this year forced them to shed stock holdings as they tried to rebalance their exposure to volatility.
Good news, everyone: Since both realized and implied volatility have declined over the past couple of weeks, JPMorgan and Deutsche see those CTAs spring-loaded to buy more stocks.
Going beyond systematic demand for equities, Goldman Sachs and other firms have highlighted the robust sales and earnings growth that has been forecast for both the quarter and the full year. In a recent client note, Goldman estimated that S&P 500 revenue would grow by 10% in the first quarter, which would be its fastest pace since 2011. The firm even went as far as to identify single stocks it expected to outperform.
Convinced yet? If so, you’re probably still wondering what to do with all of this information. Namely, where to invest and what trades to make.
JPMorgan has you covered. Led by the strategist Bram Kaplan, the firm’s equity derivatives team has five trade recommendations — one that applies to the whole US market and four addressing single stocks.
1) Buy calls on stocks that are poised to outperform this season and have cheap earnings volatility
For the first qualification, Kaplan & Co. are specifically referring to stocks positioned to most benefit from this year’s new tax bill, as well as those set to get a boost from record share buybacks. Within that subset, JPMorgan recommends identifying stocks whose implied earnings moves are being underpriced by the market.
2) Buy Allstate (ALL) May $97.50 calls
Allstate is JPMorgan’s top property and casualty insurance pick for earnings, and the firm thinks the company’s 2018 guidance is conservative. It notes the option market is pricing in an earnings-related move of 3.4%, which is below its recent average realized move of 3.9%.
3) Buy US Steel (X) $39 weekly calls expiring May 4
JPMorgan says a continued rally in steel prices should continue driving earnings upside for US Steel, which is the firm’s top pick in the industry. It notes the option market is implying an earnings-related move of 8.1%, well below its three-year average realized move of 9.8%.
4) Sell Marriott (MAR) $137 weekly puts expiring May 11
The firm’s recommendation is built largely on the positive first-quarter preannouncement recently made by Hilton Hotels. And since Marriott has recently been underperforming Hilton, JPMorgan says it has limited downside. The firm says the option market is pricing in an earnings-related move of 3.6%, above its three-year average realized move of 2.5%.
5) Buy bullish risk reversals on Dick’s Sporting Goods (DKS), Imperial Brands (ITB), and the SPDR S&P Metals and Mining ETF (XME)
This strategy — which involves selling an out-of-the-money put contract and buying an out-of-the-money call — is designed to profit from a large increase in a stock. These recommendations match JPMorgan’s bullish view on homebuilders and materials, as well as their positive fundamental view on Dick’s specifically.
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