Trading after the headlines fade
- GOOGL dropped more than 8% post-earnings on Tuesday
- One of the 15 largest one-day declines in the stock’s history
- Past drops followed by relatively consistent pattern
There’s probably only one thing you can say with certainty about yesterday’s 8%-plus drop in Alphabet (GOOGL): That was a big move.
Source: Power E*TRADE
That may sound trite, but it’s not the intention. The tech titan’s shares have dropped 8% or more in a single day (and closed down) only 15 other times since they began trading in 2004, and the last time was in 2012. So, this wasn’t exactly a run-of-the-mill event.
But as investors digest the “Alphabet Misses its Numbers” headlines, the question facing traders is, what’s likely to happen next? It’s difficult to speculate with only 15 other reference points at our disposal, but based on these events, there are a couple of generalizations we can make:
1. GOOGL is more likely than not to trade below yesterday’s close in the next several days.
2. There’s a good chance for a short-term bounce even if the stock ultimately moves lower.
First, the following table shows GOOGL’s median returns for the five days after days like yesterday, when the stock dropped 8% or more and closed down:
Source: Power E*TRADE
The long and short of this snapshot is that the stock had a mild bias toward closing lower the next day, a bias toward closing up the day after that, and then, on days 3 and 4, a stronger bias toward closing lower: GOOGL closed lower 10 out of 15 times on day 3 and 11 out of 15 times on day 4, and both days’ typical returns were solidly negative. Day 5 was a wash, closing lower eight out of 15 times with a flat median return.1
Remember, that’s the composite picture of 15 different one-day drops that occurred over an eight-year period in a variety of circumstances. Bottom line, though, more often than not, GOOGL experienced additional weakness in the first four to five days after one of these big drops, with the second day after it the most likely to buck the bearish trend.
Despite the potential near-term downside after these big down days, longer-term GOOGL bears have not been rewarded.
And although there were a few instances of GOOGL making at least an intermediate-term low several days after the big down day (take a look at what happened after November 5, 2004, February 28, 2006, and January 20, 2012, for example), there was only one case, December 1, 2008, of the stock rallying immediately after the down day and not looking back. Overall, after 10 days (two weeks) GOOGL was trading below the big down day’s closing price in nine of the 15 cases.
The other side of this coin is that longer-term GOOGL bears have not been rewarded. The stock is up more than 2,090% since it began trading in 2004, and its average one-year return is around 24%.
That’s the investing side. On the trading side, the stock may present opportunities for bulls and bears in the near future—which is about all a short-term trader can ask for.
Today’s numbers (all times ET): ADP Employment Report (8:15 a.m.), PMI Manufacturing Index
(9:45 a.m.), ISM Manufacturing Index (10 a.m.), Construction Spending (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), FOMC meeting announcement (2 p.m.).
Today’s earnings include: Clorox (CLX), CME Group (CME), CVS Health (CVS), Garmin (GRMN), Humana (HUM), L3 Technologies (LLL), Scientific Games (SGMS), Allstate (ALL), Kraft Heinz (KHC), Qorvo (QRVO), Qualcomm (QCOM), Square (SQ).
Today’s numbers (all times ET): FOMC meeting starts, Employment Cost Index (8:30 a.m.), S&P Corelogic Case-Shiller HPI (9 a.m.), Consumer Confidence (10 a.m.), Pending Home Sales Index (10 a.m.).
Today’s earnings include: BP (BP), ConocoPhillips (COP), Eli Lilly (LLY), General Electric (GE), General Motors (GM) MasterCard (MA), McDonald's (MCD), Merck (MRK), Pfizer (PFE), Shopify (SHOP), Advanced Micro (AMD), Apple (AAPL), Exact Sciences (EXAS), Lattice Semi (LSCC), Maxim Integrated (MXIM).
1 Supporting document available upon request.
2 FactSet. Earnings Season Update: April 26, 2019. 4/26/19.