EB Daily Market Report - Wednesday, October 13, 2021

Tom Bowley - October 13, 2021

Executive Market Summary

Futures were higher overnight and we managed to open higher across our major indices
Selling quickly kicked in, however, and we turned negative; however, buyers have returned and, as of my last check, all major indices were back in positive territory
Our October Max Pain webinar last night revealed that, for the first time in many months, options expiration could actually favor the bulls
September CPI showed a rather tame inflation picture, though we still have inflation at the producer level due out Thursday morning; those numbers are expected to cool from August, but still be quite elevated
Utilities (XLU, +1.03%) and materials (XLB, +0.84%) are today's sector leaders, while financials (XLF, -0.80%) are negatively impacted by falling treasury yields
Options expiration could be factoring into the financials' weakness as many companies in that space have had significant upside runs
Hotels ($DJUSLG, -1.31%), which have been hot of late, are down today and possibly printing a short-term reversing candle - more on this below

Market Outlook

If you're looking for signals that the worst of the selling is behind us, I'd keep an eye on two ratios - growth vs. value ($DJUSGS:$DJUSVS) and NASDAQ 100 vs. S&P 500 ($NDX:$SPX, or QQQ:SPY). Here's how these two ratios look right now and what I'd look for to suggest the rally may be re-igniting:

The relative PPO on the DJUSGS:DJUSVS ratio is just now crossing centerline resistance. But you can see from the two relative panels beneath it that we're still in relative downtrends. I believe that will need to change to truly see a market environment where the growth-driven technology and NASDAQ shares can thrive.

Sector/Industry Focus

Hotels ($DJUSLG) have been aiding relative strength in the consumer discretionary area recently, but they're not today. Perhaps open call interest is having a detrimental effect, but I'd view short-term weakness to be a solid reward-to-risk opportunity for entry:

This chart is bullish and quite constructive. I'm simply suggesting that a pullback could occur short-term. The PPO remains very strong, so any weakness likely will hold the rising 20-day EMA.

ChartLists/Strategies

Don't look now, but software stocks ($DJUSSW) are breaking out on a relative basis to an all-time high. Several are really beginning to take off ahead of their upcoming earnings reports. Here are a few worth considering for further price appreciation over the next few weeks:

CRWD:

CRWD has held its intermediate-term trendline and has now just broken the short-term downtrend. It looks poised to challenge the high from late August.

DDOG:

I love the PPO turning back up above its trigger line as it approached centerline support. Leadership here is quite evident. I always look for leading stocks in leading industry groups. DDOG is in our Aggressive Portfolio for that reason.

ESTC:

ESTC is different as we haven't seen that breakout. In fact, I'm highlighting a cup with handle pattern on a longer-term weekly chart. I see a breakout above 172.15 on heavy volume as a signal to look for a potential measurement to the 240-245 area. It's a fast mover, which means that it's also aggressive and volatile. Consider that in deciding whether to trade it and position size accordingly.

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.

Wednesday, October 13:

JPM, BLK, INFY, WIT, FRC, DAL

Thursday, October 14:

TSM, UNH, BAC, WFC, MS, C, USB, WBA, DPZ, AA, DCT, CMC

Economic Reports

September CPI: +0.4% (actual) vs. +0.3% (estimate)

September Core CPI: +0.2% (actual) vs. +0.2% (estimate)

Happy trading!

Tom