Chart Advisor: Before the Bell

Thursday, 21st October, 2021

1/ Indexes go green on late session buying 

2/ Freight demand up along with UNP shares 

3/ AT&T’s results fail to inspire 

4/ The bottom line

1/ Indexes Go Green on Late Session Buying 

Early in the session traders took profits, but buyers stepped in during the last hour to bring stocks to fresh new highs. State Street’s Dow Jones Industrial Average ETF (DIA), one day after setting a record high, closed nearly unchanged. However, after spending most of the session in the red, the other three major indexes notched higher. iShares Russell 2000 ETF (IWM) rose  0.26%, while State Street’s S&P 500 Index ETF (SPY) rose 0.28%. Invesco’s Nasdaq 100 ETF (QQQ) proved more resilient, climbing 0.61%, driven higher by Tesla (TSLA), which rose 3.2% after a strong third-quarter earnings report.  

First time unemployment claims fell to a new pandemic low last week, as the 290,000 reported came in lower than the 298,000 that analysts expected. Continued improvement in employment has been a key data point for the Federal Reserve’s gauge of the ongoing economic recovery, and as a signal for when the Fed might taper its $120 billion per month in bond purchases.  

Investors continue to digest third-quarter earnings reports, which have been largely positive. One of the biggest concerns for bottom lines (inflation) has yet to have widespread reductions so far.  

The chart below compares the recent performance between SPY and IWM. During times of increased inflation concerns, investors could seek haven in large-cap blue chip stocks, instead of the relatively speculative small-caps. Chart watchers should notice that, while the indexes do not mirror each other exactly, IWM has not fallen precipitously, while SPY appears poised to continue higher.  

2/ Freight Demand Up Along With UNP Shares  

Investors have bid up the share prices of Union Pacific (UNP) to an extreme range after the company beat expectations for both earnings per share (EPS) and revenue for the third-quarter. Analysts forecast $2.50 in EPS and $5.39 billion in revenue—UNP reported $2.57 in EPS and $5.57 billion in revenue. Despite cutting 2021 volume growth, investors bought up shares of UNP, as the company’s operating ratio (a key profitability metric) improved to 56.3% from 58.7%. 

Shares of UNP rose 1%, well above its 20-day moving average, as illustrated on the chart below. 

Options remain priced for the UNP share price to continue to move higher in the near term. Prior to earnings, there were a greater number of put options than calls in the open interest for UNP. Perhaps investors were expecting lackluster UNP earnings, as worsening supply chain disruptions are expected to hit shipments across a sector considered critical in connecting most consumer and industrial businesses. 

3/ AT&T’s Results Fail to Inspire 

Shares of telecommunications provider AT&T (T) sold off after the company reported mixed third-quarter results, beating on EPS while missing on revenue expectations. Analysts expected AT&T to announce $0.79 in EPS and $41.2 billion in revenue and the company reported $0.87 in EPS and $39.9 billion in revenue. Additional postpaid phone subscribers came in nearly double analyst predictions. The revenue miss was attributed to lower contribution from divested businesses.  

The chart below compares the recent performance of T with State Street’s Communications Sector ETF (XLC). AT&T has lagged XLC of late and the gulf appears to be widening. While the ongoing economic recovery has been a boon for many stocks, T has suffered. Year-to-date, T has fallen 13% while XLC has added 23% in the same time frame. T is faced with an uphill battle as it continues to divest from revenue driving aspects of their business.  

4/ The Bottom Line 

Traders took profits during most of the session, though buyers couldn’t resist grabbing more shares and sending large-cap indexes to new highs. UNP shares rose on a favorable report, but there were mixed results for AT&T.

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Originally posted on 21st October, 2021