Chris Johnson

Outsmart the 'Dumb Money' With Profitable Earnings Trades

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But one of the stock's more impressive aspects was how it has performed against the broader market. While it's true the market has been terrible, JNJ's performance chart against the S&P 500 (SPX) is nevertheless impressive.

We're certainly couldn't ignore the fact that JNJ has taken its lumps along with the rest of the stock market -- and we're aware that the "low" can always go lower. But our signals showed that if the overall market moved toward stabilization, JNJ was well-positioned for a rebound.

Its most recent sell-off, the latest in a series of freefalls, pulled JNJ to historical support levels around $55. We foresaw a strong bounce off this solid support that could have resulted in a 20% gain within a few weeks, especially if earnings met or beat estimates.

There's a Reason We Call it the 'Dumb Money'

Other options players were loading up on the puts, resulting in a peak of the put/call ratio just below those that coincided with short-term stock lows in May and June. And analysts -- while typically positive toward the company, with eight of 13 listing it as a "Buy" -- left room for more upgrades.

Everyone wants to follow what they perceive as the "smart money" -- that is, institutions, hedge funds and other organizations with cash-filled coffers. But there are lots of other players out there whom we like to call the "dumb money," as their bets -- often placed in large volume -- might give the indication that they know something we don't.