‘Price action’ was a warning for Netflix — and will be for other stocks too

When investors speak with their pocketbooks, it usually means something.

If we pay attention, we may even be able to gather some insight and get ahead of the curve. This is especially true leading up to earnings releases. Some might even think that the big boys know something we don’t, but if we watch, we can see what they are doing.

This was true with Netflix NFLX, -5.46% leading up to Monday’s earnings report. As recently as July 10, Netflix was strong on a near-term, medium-term and longer-term basis. Review my July 10 article to see this and other stocks that were strong.

However, between then and the day before earnings were released (six days), Netflix changed. The stock remained strong on a medium-term and longer-term basis, but it turned weak near term. Review the Netflix report from July 16 to see this.

In a few short days, leading up to earnings, Netflix fell fast enough for it to go from near-term strong to near-term weak. That is a rapid decline, and one might argue that it told us what the smart money (professional investors) was doing with their pocketbooks. In this case, they were selling Netflix ahead of earnings.

The stock was down over 10% after earnings were reported, so the price action leading up to the earnings report may have been an advance warning. So far, it seems right.

During earnings season, this same thing can happen for other stocks as well. We should keep our eyes open for aggressive price moves, like Netflix’s ahead of earnings announcements, because they could be an indicator of what will happen after earnings releases are announced.

Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily.

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