The U.S. stock market is holding its own so far this earnings season. This is due largely to the fact that the majority of companies that have reported earnings so far this quarter have beaten analyst estimates.
Of course, it hasn’t been too difficult to beat estimates because analysts dropped their estimates quite a bit in the run up to this earnings season. It’s always easier to clear a lower hurdle.
But hey, everybody likes to see earnings beats, right?
Interestingly, Adobe (NASDAQ:ADBE) hasn’t been able to harness the bullish enthusiasm that has pushed the S&P 500 back up near its all-time highs. Instead, the stock is drifting lower within the down-trending channel it has been in since early August, making now a perfect time for a covered call.
Business Spending on Software in 2020
The cooling trade war is one potential reason for the pullback in companies like ADBE. Traders may be moving from stocks in software companies to other areas of the market. We feel that the technicals will play an outsized role for the next several weeks, and the 2019 push into tech stocks has finally started to turn around. People don’t want to push these stocks higher right now.
But business spending on software is also a concern. According to a survey from Morgan Stanley, 53% of surveyed chief information officers say their companies will spend less on information technology next year.
Earnings season is now well underway, and so far, the results have been within expectations. Profits are down from the same quarter last year, but revenue is up. That tells us that businesses are experiencing “margin compression.” In other words, compared to 2018, they are making less profit from each dollar of revenue this year.
If the economy is slowing down and companies have less money to spend on new software, ADBE will struggle.
Collecting Income Regardless
Luckily for us, it doesn’t matter if ADBE has slipped into a bit of a funk. We can generate instant income from our shares by selling covered calls whether ADBE is moving up, down or sideways.
In the chart below, you can see the down-trending range we mentioned in the beginning of this article. ADBE is currently toward the bottom of that range, and the last resistance level it hit before its most recent downturn was at $280.
Daily Chart of Adobe, Inc. (ADBE) — Chart Source: TradingView
We recommend using the $280 level as a strike price for a covered call because it is ADBE’s most recent resistance level. Based on ADBE’s bearish price action during the past week, we don’t think the stock will be able to break up through $280 anytime soon.
To ensure you earn a decent premium from this trade, we recommend picking an expiration date sometime in November. ADBE will release its next earnings report in mid-December, so barring any unexpected news, the stock is unlikely to bounce up before then. We may even have an opportunity to sell one more covered call on ADBE after this one expires.
To find out which ADBE covered calls we’re selling—and to get access to our full portfolio of income-generating trades—sign up for a risk-free trial of Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.