Chart Advısor: Continuing to Slide

Monday, 11th October, 2021

1/ Indexes show more selling than buying

2/ Southwest drifting lower before earnings 

3/ Will inflation cut into Fastenal’s margins? 

4/ The bottom line

1/ Indexes Show More Selling Than Buying 

After appearing to be positioned for a move higher, markets suffered losses to start a busy week. State Street’s S&P 500 Index ETF (SPY) and Dow Jones Industrial Average ETF (DIA) each shed 0.7%. Invesco’s Nasdaq 100 ETF (QQQ) fell 0.8%, while the iShares Russell 2000 ETF (IWM) fell 0.6%. Selling accelerated into the close. 

Investors could be waiting for signals to move in either direction, as major banks kick off earnings season, and several economic reports are due to be released this week. Investors may be watching for indications of whether inflationary influences will continue. Both consumer price and producer price index reports are expected later in the week. Since U.S. oil prices added fuel to the inflation fire, as benchmark WTI crude briefly traded over $82 a barrel, before settling above $80, investors may be growing more concerned. 

The chart below compares the recent performance of QQQ with a portfolio weighted equally between two tech bellwethers—Microsoft (MSFT) and Apple (AAPL). Since AAPL and MSFT comprise more than 20% of QQQ’s holdings, an equally weighted portfolio between the two can be used as a barometer of performance against QQQ.  

This relationship usually results in QQQ and AAPL/MSFT moving in line with each other. However, the chart below illustrates the most recent slight downturn of QQQ, while AAPL/MSFT is pulling higher. This divergence could mean that QQQ could be pulled higher by its heavier-weighted components in the near term.  

2/ Southwest Drifting Lower Before Earnings

Investors bid down the share price of Southwest Airlines (LUV) by 3% after the company canceled more than 2,000 flights since Saturday. The airline, which had already said it would slim down its schedules in the fall to avoid cancellations and delays, is considering further cuts amid staffing issues. The issues over the weekend came amid speculation that excessive sick calls among staff were tied to a federal vaccine mandate for government contractors.  

The chart below compares the recent performance of LUV with Delta Air Lines (DAL) and State Street’s Industrials Sector ETF (XLI). LUV and DAL have been relatively in line with each other, as the airline industry navigates reopening while dealing with staffing shortages. Both have outperformed XLI only recently, as the airline industry continues to be hampered by the fallout of the COVID-19 pandemic.   

Even with today’s loss, LUV has gained 33% in the last year, with DAL close behind, having gained 32% in the same span. XLI, meanwhile, has risen nearly 24%. 

3/ Will Inflation Cut into Fastenal’s Margins? 

Industrial and construction supply distributor Fastenal (FAST) is set to report fiscal third-quarter earnings results Tuesday before the market opens. Analysts expect the company to report $0.42 in earnings per share (EPS) and $1.54 billion in revenue. Despite increasing sales numbers, gross margins are expected to decline due to inflationary pressures and tightening supply chains. FAST is currently trading slightly below its 20-day moving average.  

FAST has been able to stay ahead of its industry, as illustrated on the chart below, which compares FAST with XLI. Option traders appear to be positioned for the stock to rise, as there are over 21,000 calls in the open interest compared to nearly 17,000 puts. Option pricing currently implies a 4.3% earnings-based move. FAST has fallen an average of 2.8% over its last four earnings announcements. 

4/ The Bottom Line 

tocks attempted a rebound early in the session but showed more selling activity throughout the day. Shares of both LUV and FAST sold lower than the open despite approaching earnings announcements.   

—

Originally posted on 11th October, 2021