EB Daily Market Report - Monday, October 25, 2021
Executive Market Summary
- Futures were slightly positive overnight, and we've seen price action strengthen throughout the day today so far
- Cryptocurrencies, which have been volatile, are strong today with bitcoin ($BTCUSD, +5.10%) and etherium ($ETHUSD, +4.53%) rallying
- Commodities are higher across-the-board as crude oil ($WTIC) approached $85 per barrel; natural gas ($NATGAS) is up more than 10%; gold ($GOLD, +0.75%) is above $1800 per ounce
- Energy (XLE, +1.37%) and materials (XLB, +1.27%) are leading all sectors today, except consumer discretionary (XLY, +1.49%)
- Automobiles ($DJUSAU, +6.07%) are leading discretionary stocks higher as Tesla (TSLA, +7.56%) soars to an all-time high
- Financials (XLF, -0.02%) is the only sector in negative territory
- Facebook (FB, +0.03%), a major component of a weakening internet group ($DJUSNS, +0.06%) of late, will report its latest quarterly results after the bell today
Market Outlook
One short-term issue that we face on the long side are the plethora of 60-minute negative divergences. They're all over the place. That guarantees us nothing, but it does raise the caution flag as we search for new opportunities. here's the latest S&P 500 hourly chart:
I've also plotted the RSI on this chart. I'm not a big fan of using divergences on RSI because the RSI is bound. You can't go higher than 100 and it's rare to even see RSI readings above 90. Therefore, when the RSI reaches these elevated levels, we're almost guaranteed to see a negative divergence print, whether momentum is slowing or not. But since this RSI negative divergence also coincides with a PPO negative divergence, I wanted to point it out.
Sector/Industry Focus
Energy (XLE) and materials (XLB) are leading today's action, along with consumer discretionary (XLY), but the sustainability of the XLE and XLB leadership remain in question given the dollar's ($USD) recent uptrend. As a reminder, here is a long-term chart of both the XLE and XLB on an absolute and relative basis:
I think it's fine to stick with your energy and materials trades for now, if you so desire. I just would not lose sight of this long-term relative chart that clearly shows the decade-long relative underperformance of both groups. I believe both of these areas are benefiting from the increased demand and supply chain issues. I'm looking for these short-term "bubbles" to pop at some point. Demand will eventually slow down (probably in 2022) and supply chain issues will be ironed out. At that point, I'd look for a significant correction in both energy and materials prices.
Many technicians disagree with me and believe this is the start of much higher inflation. I've been wrong before and I could be wrong again, but I believe pricing will return to more normal levels in 2022.
ChartLists/Strategies
Because this week historically is so bearish, I'd consider only smaller-than-normal position sizes for now. Here are a few interesting trade candidates:
CALX (reports earnings this afternoon):
A trade here just before earnings would be incredibly risky. However, I wanted to point it out. Based on the way CALX is trading, I'm expecting a big earnings report. We'll see. And even if the numbers are good, that doesn't mean we'll see a positive reaction. It's another learning opportunity for all us though. Wall Street likes it, but will that translate into a positive reaction later today?
ENTG (reports earnings tomorrow morning):
Here's a second example of a company that I believe will report excellent results. There's been leadership in a strong industry group - semiconductors ($DJUSSC) - and an AD line setting new highs. But the risk of holding into earnings is quite high. Again, we'll watch and learn.
CBOE (reports earnings on Friday morning):
CBOE, unlike the previous two stocks, is not a leader among its peers, but it's just broken out so that could change. CBOE won't report until Friday, so we could definitely see a continuing pre-earnings run this week. The relative weakness would worry me a bit more when it comes to the actual earnings being reported, though. Another lesson will likely be learned on Friday.
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, October 25:
FB, KMB, CDNS, OTIS, ARE, SUI, QSR, BRO, LOGI, CCK, PKG, LII, UHS, AGNC, MEDP, TNET, CR
Tuesday, October 26:
MSFT, GOOGL, V, LLY, NVS, TXN, UPS, AMD, RTX, GE, SPGI, MMM, LMT, CB, SHW, COF, WM, ECL, UBS, MSCI, TWTR, DLR, CNC, CSGP, ADM, HOOD, AMP, GLW, EQR, PCAR, CAJ, ENPH, TRU, ESS, AGR, TER, PFG, BXP, ENTG, IEX, UDR, MASI, TECK, FBHS, CHRW, PHM, HAS, FFIV, PNR, IVZ, MANH, HUBB, QS, ARCC, JNPR, ST, PII, BYD, RRC, TENB, MTDR, JBLU, SSTK, APAM, XRX, DAN, CVLT, NAVI, NBR
Economic Reports
None
Happy trading!
Tom