The Dynamics Behind Carnival's Q2 Earnings Rally

When an issue is in an extended downtrend and rallies off an earnings report, the next task is to determine if the rally will continue. That is what shareholders of Carnival Corp CC were confronted with in Monday’s session.

Tim Quast, the founder of Market Structure Edge, joined Benzinga's "PreMarket Prep" on Monday to give his thoughts on the cruise stock, making it the PreMarket Prep Stock Of The Day.

Carnival's Rough Few Months: On April 5, the cruise line reached $21.50 and backed off to end the session at $20.22, and the retreat was just beginning. By June 16, the issue had been more than cut in half when it bottomed at $8.70 and ended the session just above that low at $8.75.

That marked the lowest level for the issue since it bottomed in April 2020 at $7.80. It followed the broad market higher and ended last Thursday’s session —ahead of its second-quarter report — at $9.65.

Carnival's Q2 Report, Business Update: Despite a substantial EPS and revenue miss, the Street focused on the company's upbeat business update.

That included sales growth that was 50% higher than the second quarter of 2021; occupancy that was 69% versus 54% in the preceding quarter; and as of June 24, 2022, 91% of the company's capacity was in guest cruise operation.

Carnival's Friday Price Action: With a major rally in the broad market underway, the issue far outperformed the S&P 500 cash index, which added 1.5%. 

The issue advanced $1.20 or 12.4% to close at $10.85, which was the highest closing price since June 10, when it settled at $11.05.

From the low close for the move, that was a gain of $2.10 or 24%.

Now What? In the video below, Quast explains the dynamics behind the rally in Carnival and others in the sector and weighs in on its next move.

According to his analysis, there was a substantial increase in demand for the issue ahead of the report while supply was declining.

Perhaps it could have been short sellers wanting to lock in some profits after the big decline ahead of the unknown outcome of the earnings report.

With the majority of the supply, according to his metrics, still in the hands of the short sellers, Quast was cautious about whether the rally would continue.

“If you traded the cruise lines for the long side last week, you may want to consider taking some profits,” he told Benzinga. 

The discussion on the issue from Monday’s show can be found here:

CCL Price Action: After a slightly lower open, the issue challenged Friday’s high ($10.88), but came up shy, reaching $10.81 before reversing course.

The ensuing decline found support well ahead of Friday’s low ($9.48), only reaching $10.18. As of 12:15 p.m. EST Carnival had rebounded back to the $10.50 area and the stock ultimately ended the session down 2.94% at $10.55 

Carnival Moving Forward: With a potential double top in place, which is just ahead of its June 10 close ($11.05), the issue has a clear hurdle to clear in order for the rally to continue. If the issue can clear and hold $11, the next daily high is not until its June 10 high of $12.07.