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Chart Advisor: Cooling Off

Posted October 28, 2021 at 2:04 am
Gordon Scott

Wednesday, 27th October, 2021

1/ Traders took profits outside of the tech sector 

2/ Microsoft strikes new high on strong results 

3Fast food still in demand 

4/ The bottom line

1/ Traders Took Profits Outside of the Tech Sector 

Markets cooled Wednesday as third-quarter earnings momentum tapered slightly, pushing most major indexes lower.  

The small-cap focused iShares Russell 2000 ETF (IWM) dropped 1.8%. State Street’s benchmark Dow Jones Industrial Average ETF (DIA) fell 0.5% a day after setting a record high. State Street’s S&P 500 Index ETF (SPY) shed 0.3%. Invesco’s Nasdaq 100 ETF (QQQ) was the standout, as the tech-heavy index notched a new high intraday, rising 0.5%, likely in anticipation of positive news from Apple (AAPL) tomorrow after the bell.  

QQQ continues to drive higher on the back of major tech earnings. Microsoft (MSFT) and Google (GOOG) both reached new record highs after stellar earnings reports. Growth of mega-cap tech stocks could mean that investors see upside in these stocks for the near term. 

SPY has set new records of its own of late and is on pace for its single best month since November 2020. However, QQQ continues to lead SPY. With many of the large tech stocks comprising top holdings of SPY, it could mean that SPY catches up to QQQ, or the Nasdaq 100 ETF contracts a bit to be more in line with SPY. 

2/ Microsoft Strikes New High on Strong Results 

Investors have bid up the share prices of Microsoft (MSFT) to an extreme range after the company exceeded expectations in its fiscal first-quarter earnings announcement. Analysts predicted the software giant to report $2.08 in earnings per share (EPS) and $43.9 billion in revenue. MSFT announced $2.71 in EPS and $45.3 billion in revenue and offered higher-than-expected revenue guidance for its fiscal second quarter. MSFT rose 4.6%, notching a new record high.  

MSFT’s earnings-based share price increase places the stock in an extreme range on the high end, well above its 20-day moving average. Option traders appear to be positioned for the stock to rise in the future, as trading volumes on Wednesday featured over 739,000 calls compared to 268,000 puts. The nearly 3-to-1 ratio of calls to puts illustrates the bias option traders had and expresses a bullish sentiment toward MSFT stock.  

3/ Fast Food Still in Demand 

Coca-Cola (KO) shares were on the rise after the company reported fiscal third-quarter earnings. Analysts expected the beverage giant to announce $0.58 in EPS and $9.75 billion in revenue. KO beat on both figures, reporting $0.65 in EPS and $10.04 billion in revenue. The revenue increase was attributed to an increase in its away-from-home channels such as restaurants and movie theaters. KO shares rose nearly 2%.  

The chart below compares the recent performance between KO and State Street’s Consumer Staples Sector ETF (XLP). Even with the earnings-based share price increase, KO remains behind XLP amid increasing costs and supply chain constraints. While XLP has added nearly 7% year-to-date, KO has increased 5% in that same time frame.  

With investors continuing to add to the coffers of blue-chip technology stocks,  a rotation into inflationary safe havens may be delayed.  

4/ The Bottom Line 

Stocks had mixed results with broader indexes shedding some of their gains while the tech sector rose on good news from Microsoft. The anticipation of earnings from Apple, and from large companies like Coca-Cola gives investors hope for continuing growth in the economy. 

Originally posted on 27th October, 2021

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