From a trading perspective, volatility is usually your friend. You cannot make money without movement, and it doesn't matter whether that movement is bullish or bearish. We certainly have volatility right now, but within that volatility are some moves by individual stocks that scare even the most risk-savvy traders and investors. It is a time to be careful, and to take quick profits when they are available and even quicker losses when they are not.
Even before Russia launched their attack on Ukraine, stocks were showing high volatility in the very real sense of big daily swings, both down and up, and that has only increased over the last week or so. However, the net result after all the jumping around is that stock indices this morning are right around where they were last Monday before the most recent chaos began. The overall move to this point has been minimal in general terms, creating a good trading environment for index futures and the like, but the moves in some individual stocks are so big as to be almost nonsensical.
The reactions to two earnings reports, one after the close yesterday and one before the open this morning, illustrate that point.
Yesterday’s was from First Solar (FSLR) (Disclaimer: At the time of writing, the author is long FSLR, although, based on what I am about to write, may not be by the time you read this). They beat expectations on the bottom line but did so on slightly lower than expected revenue, while pointing out that their business is still suffering pandemic-related supply disruptions that led them to guide a little lower than the Wall Street consensus for full-year revenue. The stock reacted like this:
Let’s just pause for a moment and consider what happened last quarter at First Solar. They faced extremely challenging market conditions that reduced their sales, and yet they still managed to make more money than expected. That shows that they can adjust and do well in these exceptional circumstances. If that is the case, then the fact that they foresee challenging conditions continuing for a while should not be a major cause for concern. And yet the stock dropped close to 20% on the release.
On the other side of the same coin, Nordstrom (JWN) also overreacted to their earnings report this morning, albeit in the opposite direction. The iconic retailer has been struggling. The stock had lost around 60% from its high last March to the low a couple of days ago then, after earnings this morning, it did this:
As you might imagine, they were good earnings. EPS of $1.23 beat the consensus estimate for $1.04 on slightly higher than expected revenue, and Nordstrom took the opposite view to that of FSLR, issuing guidance that suggests that they believe supply chain issues are largely behind them. That doesn’t, however, mean that JNW’s issues are over. The stock has dropped 60% over the last year, and for good reasons. Nordstrom has been slow to come to the idea of “omnichannel retail” and has had problems with its off-price business, Nordstrom Rack. They seem to have made some improvements in both areas, but nothing is truly "fixed."
As I said, a good earnings report, but does it justify a 41% jump in the stock? Of course not, nor does FSLR’s report justify a 20% drop.
These two exaggerated moves, though, show why I am wary of taking positions in this market. If you get something wrong, the big gaps between trades make terrible fills on stop loss orders likely and if you try to take advantage of news, positive or negative, the first price available to you is often so far removed from the pre-news levels and so much of an exaggeration that fading your own view is probably a better option than coming late to the party. There is big money to be made if you get it right, but the nature of the market makes it almost impossible to control your losses effectively. Successful trading and investing are about balancing risk and reward, and when you have no control over risk, that is impossible.
While markets that are volatile are usually appealing to me, I am largely sitting this one out. Moves in individual stocks in response to news are so exaggerated that holding any position for any length of time is highly dangerous. Each trade becomes no more than a 50/50 proposition in this kind of market with big P and L swings, and I prefer to trade when the odds are in my favor. So, I am not getting heavily involved right now. I am occasionally trading in the opposite direction to some of these moves then exiting those positions quickly, but my logical self is telling my instinctive self to not try that too often.
This will all sort itself out at some point and, when it does, there will be some bargains to be had. Until then, though, I am sitting on my hands.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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