The phrase “hot take” has become a derided cliché in the worlds of sports talk and news media, but it has been a way of life for traders since trading began. It is when people instantly overreact to news, imbuing it with far more significance than it deserves and drawing long-term conclusions from one short-term event.
Conventional wisdom says that it is a result of a cynical attempt to draw listeners, viewers, and readers by sensationalizing news, but there is another, more prosaic reason that overreaction happens, at least in a dealing room. When you are focused on one thing all day every day, be it a stock or stock sector, a currency pair, or a futures contract, news that impacts it often seems to you to have broader significance than it really does. If it turns your narrowly-focused world upside down as a result of a piece of news, then it must have major significance everywhere, right?
That is why I so frequently look for overreaction to news in the premarket as a trading opportunity. Bad news with a relatively short-term impact can wipe billions of dollars off of the value of a company, even if that company’s long-term value proposition remains intact. More broadly, when one company’s misfortune or disappointing performance is taken as an indicator for the whole market or the economy, it can create a good opportunity to buy stocks dragged down by the reaction at a discount.
Sometimes, though, company-specific news comes along that really does say something about the overall economy and, when that happens, even a big reaction can be just the start of an even bigger move.
That is what is happening this morning with FedEx (FDX). After the market closed yesterday, the logistics giant reported big misses on both revenue and earnings for last quarter. In the announcement, they issued a profit warning, withdrew their year-end guidance, and announced a big restructuring plan that involves closing ninety offices and five corporate locations and deferring hiring plans.
The stock is trading down around twenty percent in the premarket as a result. That is a big move and there may be a bit of a retracement in the stock this morning, but while that move may be overdone, the reaction in stock index futures looks like the opposite, an underestimation of the significance of the news. If there is one company that really has its finger on the pulse of global consumer behavior, it is FedEx, and if they are hurting, we will all be hurting, too.
The main S&P 500 futures contract (ES) did drop around 4:30 yesterday after the announcement and is trading lower still this morning, but as I write, ES is trading around 3890, which is 33 points, or 0.84%, lower than it was immediately before the announcement. You could say that given that there was some good news out of China overnight, that this is a reasonable response to that. The thing to keep in mind, though, is that the boost to industrial production, retail sales, and fixed-asset investments in China were prompted by a big government stimulus package, not something that can be expected from western nations struggling with inflation.
So, if we discount the better-than-expected China data, what we are left with is a company telling us quite clearly that a recession is on the way, and stock futures are less than one percent lower as I write this. I hope I am wrong, but to me, that sounds not like a hot take overreaction, but rather the beginning of another big leg down in the market that will bring the June lows into play before too long.