The earnings landscape is quiet this week, with just five S&P 500 companies reporting. Two of those are after today’s close, leaving little for the remainder of the week. So we’ll just have to look backward for this week’s earnings trade.
Adobe Systems Incorporated (NASDAQ: ADBE) reported earnings last week, and the stock got walloped after disappointing the Street with an outlook that came in shy of expectations. The market was obviously in no mood to be messed with, as ADBE dropped as much as 21.6% on Wednesday before closing down 19% on the day.
In the wake of the carnage, though, are signs of strength.
The shares are up about a percent off their low on higher volume. The $26 level appeared to provide support, much as it did back in July. And we’re seeing a big influx of call volume, a sign that traders feel the stock was punished too severely.
Looking further into the technicals, ADBE is the third most oversold S&P 500 stock right now thanks to last week’s plunge. Similar oversold levels marked bottoms in the shares over the past year.
On the sentiment front, ADBE was hit with several downgrades last week, such that just 45% of all covering analysts now rate the stock a “buy.” Further downgrades are unlikely in the near term.
Frankly, we’re not sure if ADBE is out of the woods. The company is operating in a space crowded with heavy hitters, including Apple Inc. (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT). The long-term outlook may indeed be suspect.
But we’re looking for a trade, not an extended relationship. The volume, chart and option activity tell us that the stock should enjoy a short-term bounce if for no other reason than many feel the sell-off was overdone. This is a technical trade, not a fundamental endorsement.
Look for the bounce to continue over the next week or so. Right now, the October 27 and 28 calls are getting most of the attention from the options crowd. We prefer the at-the-money ADBE Oct 27 Calls rather than the riskier $28 strike. To double at expiration, the 27 call needs the stock to gain 5.5%, while the 28 call requires a 6.8% move. In this market, we’ll take the safer route.
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