EB Daily Market Report - Tuesday, February 2, 2021
Executive Market Summary
- Futures were strong right out of the gate and the buying hasn't stopped
- All of our major indices are up close to 2%, following through on Monday's recovery; small caps ($SML) are higher, but lagging significantly
- The makeup of this rally is extremely bullish; of our aggressive sectors, only technology (XLK, +1.39%) is performing below average
- Consumer discretionary (XLY, +2.74%) is very strong and breaking out on its weekly relative strength chart
- Of the 20 industry groups in the XLY, 2 are up more than 5%, 6 are up more than 3% and 12 are up more than 2%
- Gambling ($DJUSCA, +6.22%) is surging, as is travel & tourism ($DJUSTT, +5.00%); the latter was mentioned as an industry group that performs well in February
- The 10-year treasury yield ($TNX) is up 3 basis points to 1.10%, aiding financials (XLF, +2.57%)
- Banks ($DJUSBK, +3.04%) are a clear beneficiary of the jump in the TNX
Market Outlook
There are a few positives to discuss here.
Consumer discretionary (XLY) swamping consumer staples (XLP):
NASDAQ 100 ETF (QQQ) attempting breakout above S&P 500 ETF (SPY):
Growth stocks (IWF) on verge of key breakout vs. value stocks (IWD):
These 3 ratios, when breaking out together, are undeniably bullish. The IWF:IWD hasn't yet made the breakout, but it's rallied nicely off that 1.69 relative support level. A breakout here would add to everything else I'm seeing in the stock market.
It's really hard to bet against this market, even in the short-term. One thing to watch, however, would be a false breakout tomorrow after strong results from both AMZN and GOOGL. An intraday tail in breakout territory with a close beneath recent highs could suggest more consolidation ahead, really frustrating both bulls and bears. It would be more of a short-term trading issue than a longer-term buy and hold issue.
Sector/Industry Focus
Will the NASDAQ 100 ($NDX) break to a new all-time high? Eventually, yes. But will it be after earnings tonight? It very well could. Amazon.com (AMZN) and Alphabet (GOOGL) report their quarterly results after the bell today and they represent 8.88% and 6.00%, respectively, of the QQQ (ETF that tracks the NDX). The QQQ isn't far from a breakout and it certainly stands to reason that strong results and reactions from two of its largest component stocks could generate that breakout. Here's the current technical look at the QQQ:
While the bullish ascending triangle isn't perfect, there's no denying the overall bullishness of this chart. We had a solid uptrend, a basing period, and now we're trending higher in a channel after the recent breakout. And given the strength in earnings thus far, what's not to like?
ChartLists/Strategies
Do you like taking the risk associated with holding stocks into earnings? Well, if I was to take a chance on an earnings report, I want a few things. First, I want a leading stock that's preferably in a leading industry group. Adding to my wish list would be a recent pullback to help lower the risk. If you buy a stock heading into earnings that's been on a recent "heater" (big move up), there's a reasonable chance it's a "buy on rumor, sell on news" type of trade, adding to the risk of buying just before earnings. That heater would suggest that an excellent report is likely, but as we've seen during every earnings season, that doesn't always mean the market will react positively. However, if you have a stock that's been a leader, but pulls back just prior to earnings, there's a better chance that we'll see a gap up and breakout after earnings. Mind you, I haven't done a study on this, just an observation.
In order to try to uncover such stocks, I ran a scan against our Upcoming Earnings ChartLists (newest set of ChartLists) as follows:
I have a volume filter because these Upcoming Earnings ChartLists are not reviewed as to volume. Companies are included if they have market caps above $1 billion. They were not filtered based on any other technical indication or condition. The SCTR above 85 ensures that the stock has shown relative strength recently. The RSI beneath 55 tells us that the stock is off of its recent highs. Here were the 8 stocks returned:
I like the top 2, plus RL:
CPRI (reports Wednesday morning):
CPRI needed a breather and the negative divergence set the stock up for one. The pink arrows mark a 50 day SMA test and nearly a PPO centerline test. I don't believe momentum is an issue here any longer. We're showing strength today. A solid report in the morning could result in a gap higher on CPRI.
PTON (reports Thursday afternoon):
PTON has continued to test key gap support, while working off its recent negative divergence. Volume has really subsided, which isn't anything horrible. We're not breaking out and we're not breaking down, so lighter volume is fine. I really like the fact that the relative strength of recreational products ($DJUSRP) has been increasing the past several months and I also like PTON's AD line remaining strong. If institutions have been exiting, it's not showing up in either volume or the AD line. This one has tremendous potential, but also high risk.
RL (reports Thursday morning):
Like the other two, RL printed a negative divergence, suggesting that short-term momentum was slowing. It's also pulled back to test its 50 day SMA and approach its PPO centerline (pink arrows). Clothing & accessories ($DJUSCF) were very strong on a relative basis throughout the pandemic, but showed some relative weakness in January. I think that's providing an opportunity.
All three of these show tremendous potential, but earnings reactions can be quite cruel. I would expect all three of these companies to report strong quarterly results, but which ones, if any, actually respond with a big gap higher remain a mystery. It's why I've always been so fascinated by earnings season. In the end, the market gets it right, but the path is rarely a straight line.
Earnings Reports
Here are the key earnings reports for the next two days, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning.
Monday, February 1:
TMO, VRTX, ITUB, NXPI, OTIS, ARE, WMG, ON, WWD, CACC, KRC, CRUS, OMCL, KMT, PCH, FN, CBT, RMBS, SKY, HLIT, AKTS
Tuesday, February 2:
AMZN, GOOGL, BABA, PFE, XOM, AMGN, UPS, BP, CB, HCA, EMR, ETN, COP, EA, CMG, IDXX, LU, RACE, MTCH, SYY, MPC, MCK, SIRI, MPLX, CTLT, AMCR, PKI, WAT, BR, STE, IMO, MKL, BEN, ENTG, ATHM, TECH, FBHS, ATO, LII, DOX, MANH, LITE, HOG, HAE, BRKS, TENB, MAN, GPK, VIAV, MDC
Economic Reports
None
Happy trading!
Tom