Reuters / Brendan McDermid
- Goldman Sachs finds that January has historically been filled with stock price-moving events, and recommends investors position accordingly.
- The firm outlines a handful of option trading strategies that can help investors take advantage of heightened volatility in early 2019.
If you were thinking about gradually dipping your toes into the 2019 investment landscape, you might want to reconsider that approach.
So says the derivatives team at Goldman Sachs, which sees plentiful money-making opportunities available to traders in early 2019.
Goldman's early-year recommendations revolve around corporate preannouncements and the stock fluctuations they generally create. The firm analyzed more than 3,500 guidance updates from US companies since 2011 and found that 26% of the annual totals came in January alone.
Goldman Sachs
What's more, Goldman expects these sorts of corporate updates to have an even bigger impact on share prices next year, given what's transpired in 2018.
The reasons are threefold. First, the firm says investors are closely watching company guidance around the impact of tariffs and supply-chain disruptions. This, in turn, could result in price swings in both directions ahead of earnings reports.
Second, Goldman says consumer health is of great importance to investors right now, which means any surprising holiday sales data could spur volatility in many associated stocks.
Lastly, and perhaps most straightforwardly, market-wide volatility is 44% higher over the past 12 months, relative to the previous year. As an extension of that, Goldman finds that earnings reports have moved stocks 4.4 times more than the average trading, which is well above the trailing 20-year mean.
Goldman Sachs
Those combined elements make a convincing case for more price swings in early 2019. But how exactly can investors play that? After all, they still have to make the right wagers and pick the correct industries.
To that end, Goldman says three sectors - healthcare, consumer discretionary, and tech/media/telecom (TMT) - have accounted for a whopping 80% of total January preannouncements over time. As for the methodology from that point forward, allow the firm's strategists to explain.
"In conjunction with our analysts, we identify where the options market could be missing the potential for stocks in these sectors to make big moves around scheduled updates, management presentations ahead of earnings or on earnings itself," they wrote.
Before we get into the events that could generate volatility in the three sectors mentioned above, it's important to outline Goldman's methodology when it comes to using options to profit from price swings. The firm recommends traders buy a straddle that can profit from an outsized move in either direction.
"If the company updates investors ahead of results, investors could benefit if the move in the stock offsets the carry of owning options," the Goldman strategists said. "However, if no preannouncement occurs, then investors still own options that are likely to capture typically stock moving events."
Goldman also offers the alternate approach of backing into where option traders are pricing in earnings-driven catalysts. The firms notes that, given the increased popularity of weekly options on individual stocks, it can "provide an even more targeted view on the timing of expected volatility in the market."
With all of that established, here are the key first-quarter events Goldman says could whip up volatility in healthcare, retail, and TMT.
Healthcare conferences and analyst days that take place throughout January
Goldman notes that almost half of all guidance updates that came outside earnings events over the past eight years happened in the first four weeks of the year.
"Management teams may feel compelled to provide updates ahead of presentations at financial conferences (i.e., GS Healthcare CEO Unscripted Conference is January 3, 2019), medical conferences and or company organized analyst meetings that occur alongside these events," Goldman wrote.
Retail management presentations at conferences
Goldman specifically highlights the consumer discretionary conference called ICR Xchange, which is held from Jan. 14-16. The firm also notes that retail stocks have historically accounted for one-third of all January guidance updates.
TMT preannouncement activity has historically peaked in the second week of January
Goldman says this fact stands in contrast to options prices being lifted for reported earnings in February and beyond. Further, the firm says the sector has accounted for 16% of January guidance updates.
Get the latest Goldman Sachs stock price here.