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Chart Advisor: Breaking Above

Posted October 26, 2021 at 3:08 am
Gordon Scott

Monday, 25th October, 2021

1/ Stocks close above resistance, outpacing other assets  

2/ Banking sector stocks continue to rise 

3Investors uncertain as Alphabet earnings approach 

4/ The bottom line

1/ Stocks Close Above Resistance, Outpacing Other Assets  

Stocks continue to edge higher on the strength of third-quarter earnings reports. State Street’s S&P 500 Index (SPY) set a record high intraday. Increasing bullishness could be seen across nearly all asset classes of late. Invesco’s DB Commodity Index Fund (DBC) continues to edge higher as the U.S. dollar, illustrated on the chart below by Invesco’s DB USD Index ETF (UUP), appears to be tracking downward from a recent upward trend.  

Commodities and the U.S. dollar have an inverse relationship. So, it is natural that when the U.S. dollar fluctuates in value it will impact the intrinsic value of commodities. As the dollar rises in value, it takes fewer dollars to purchase a commodity, and thus its price falls. That’s why a falling dollar is bullish for both commodities and stocks, since both are dollar denominated. 

The iShares 20+ Year Treasury Bond ETF (TLT), which tracks bond prices, appears to be pulling back from recent highs in September, creating a negative influence on technology stocks. During periods of economic expansion, bond prices and stocks move in opposite directions as they compete for capital. The recent pullback of bond prices could mean that investors are optimistic toward continued economic growth in the near term.  

2/ Banking Sector Stocks Continue to Rise 

Investors bid up the share prices of HSBC (HSBC) well above the 20-period moving average after the company exceeded analyst expectations for earnings per share (EPS). Analysts forecast $0.16 in EPS and $12.18 billion in revenue, HSBC reported $0.19 in EPS and $12.01 billion in revenue. Despite the revenue miss, investors were encouraged by a planned share buyback of up to $2 billion. The bank’s reported pre-tax profit for the third quarter increased 75% from a year ago to $5.4 billion. 

The chart below compares the recent performance of HSBC stock with State Street’s Financial Sector ETF (XLF). HSBC has been on a relative uptrend of late, bolstered by strong third-quarter earnings results across the financial sector. This is most evident in XLF’s recent returns, as the sector ETF has increased 39% year-to-date. In the same span HSBC has risen 18%.  

Options appear to be priced for the share price to continue to rise in the near term, and recent trading volumes favor call options over puts nearly 3-to-1. 

3/ Investors Uncertain as Alphabet Earnings Approach 

Alphabet (GOOG) is due to report fiscal third-quarter earnings Tuesday after the market closes. Earnings season has been positive so far overall, but mega-cap earnings could influence markets in unforeseen ways. Analysts expect GOOG to report $23.37 in EPS and $63.35 billion in revenue. The company has beat expectations in each of the last four quarters.  

GOOG has outperformed its sector in the past month, as illustrated on the chart below. The chart compares GOOG with State Street’s Communications Sector ETF (XLC). In the past year, XLC has added 32% while GOOG has gained 74%. The classand class C shares of GOOG comprise nearly 24% on XLC’s holdings, so gap between the two, their performances relatively mirror each other.  

The open interest for GOOG shows that option traders appear to be positioned for the stock to fall in the future, as puts outnumber calls more than 2-to-1. The current put open interest for GOOG is higher than usual over the past 52-weeks and recent trading volumes show a smaller gap between calls and puts. On Monday, there were nearly 15,000 puts traded compared to nearly 11,000 calls.  

4/ The Bottom Line

Stocks and commodities rose, as bonds and the U.S. dollar index fell. The price action for HSBC did remarkably well considering the company’s mixed report. Alphabet investors appear cautious ahead of the company’s earnings report tomorrow.   

Originally posted on 25th October, 2021

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