In our nightly global macro note The Closer last night, we noted strong breadth among the 27 GICS Level 3 Industries that we classify as cyclical. As-of yesterday’s close, all 27 were up on the year, with performances ranging from +30% gains for Construction Materials, Consumer Finance, and Building Products to weaker sub-2% gains from Distributors and Diversified Financial Services. Below, we show price returns by industry.  Start a two-week free trial to Bespoke Institutional to access The Closer and the rest of Bespoke’s suite of Institutional products.

The strong cyclicals breadth bodes well for returns the rest of the year. Since 2004 (full data for all 27 industries starts in that year) there has never been stronger breadth at this part of the calendar. Generally speaking, strong cyclicals breadth is a positive sign for returns the rest of the year. There have been 8 previous years where at least two-thirds of cyclical industries were up through July 22nd. The market as a whole was up through the end of the year in seven of those eight instances, suggesting smooth sailing through the end of 2019.

In our view, how a stock reacts to its earnings report is the ultimate arbiter of how good or bad the report actually was.  To get a read on the overall market, we keep track of the median one-day price change for all stocks that have reported earnings on a rolling three-month basis.  Over the last three months, the median one-day price reaction to earnings has been nearly flat at -0.03%, so we’d say earnings have been “market neutral” over the last quarter.

Below is a chart showing the rolling 3-month trend for earnings reactions over the last five years.  As you can see, the trend swings from positive to negative and back to positive quite a bit, so we’d categorize this as a mean reverting indicator.  Earlier this year in Q1 when the market was bouncing back from a horrific Q4 2018, stocks were trading extremely positive in reaction to earnings.  In fact, we saw the highest reading over the last five years towards the end of Q1 when stocks were experiencing a median one-day price change of roughly 0.75% in reaction to their earnings reports.  Since that peak, however, we’ve seen price reactions to earnings drift lower.  At the end of June, the reading had dipped negative, meaning companies were experiencing declines more often than gains in reaction to earnings, but over the last few weeks, we’ve started to see price reactions improve.

Now that we’re entering the thick of the Q2 reporting period, a continued move higher for stocks reporting earnings would go a long way in causing an overall market breakokut.  Stay on top of the most recent earnings trends by starting a two-week free trial to Bespoke Institutional.

Below is a quick rundown of earnings results from Monday, July 22nd.  Of the twelve companies that reported their Q2 numbers, 50% beat EPS estimates, one reported inline, and five missed.  Just 33% of companies beat sales estimates.  On the day, the average stock that reported traded lower by 0.23%.  Halliburton (HAL) was the day’s biggest earnings winner with a gain of 9.15%.  Scorpio Bulkers (SALT) gained the second most at +7.38%, followed by RPM International (RPM) at +4.5%.  Cadence Bancorp (CADE) was by far the biggest earnings disappointment yesterday with a one-day drop of 19.12%.  Stay on top of the most recent earnings trends by starting a two-week free trial to Bespoke Institutional.

Last Thursday was a really bad day for Netflix (NFLX) when the stock fell more than 10% after reporting weaker than expected subscriber growth in Q2.  The stock hasn’t really been able to re-gain its footing since then either as it also traded lower on both Friday and Monday.  While it’s no surprise that NFLX has been weak since its earnings report, the stock was also weak heading into the report with a losing streak of five trading days.  In total, NFLX has traded lower on each of the last eight trading days.  Over this time period, the stock has seen an intraday peak to trough decline of over 20%, which is significant even for a volatile stock like NFLX.

As far as eight-day losing streaks are concerned, they don’t come often for NFLX.  Since the company’s IPO in 2002, there have only been five other losing streaks of eight or more days, and the most recent was more than five years ago in March 2014, and that was also the longest losing streak in the stock’s history at 11 days. Besides that period, there has only been one other streak that lasted more than eight trading days, so if Netflix finishes in the red today and tomorrow, it will truly be one of the stranger things that have happened in the stock’s history.

In the table below, we have listed each of the prior eight-day losing streaks for NFLX in its history.  For each period, we have listed the eighth day of the losing streak and then how the stock performed over the following one week, one month, and three months.  The only time that NFLX saw a negative one week return was following the streak that lasted eleven trading days, and the overall average one week return was a gain of 11.9% (median: 8.2%).  One month later, the stock saw an average gain of 16.4% (median: 26.9%) with gains three out of five times.  Finally, three months after the eighth day of the losing streak, NFLX was higher all five times for an average gigantic gain of 63.2% (median: 46.6%).  One note of caution here, however, is that with a market cap of $135 billion, Netflix is not the same company or stock it was fifteen, ten, or even five years ago.  While it is still volatile now, it is nowhere near as volatile as it once was, so don’t expect anything in the vicinity of a 63% (or even a 46%) move in NFLX over the next three months.  NFLX shareholders would willingly take a quarter of that at this point.  Earnings season is about to get really busy, so stay on top of the latest trends and moves by starting a two-week free trial to Bespoke Institutional to access our interactive Earnings Explorer and receive ALL of our premium equity research.