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Chart Advisor: Signaling Inflation

Posted November 10, 2021 at 2:54 am
Gordon Scott

Tuesday, 9th November, 2021

1/ Stocks retreat from highs on inflation news 

2/ D.R. Horton rises on earnings beat 

3Option traders bet on Disney

4/ The bottom line

1/ Stocks Retreat From Highs on Inflation News 

Stocks pulled back from record highs amid relatively high inflation readings for the month of October. Invesco’s Nasdaq-100 ETF (QQQ) led the way lower, falling 0.7%. The iShares Russell 2000 ETF (IWM) fell 0.5%, State Street’s S&P 500 Index ETF (SPY), and Dow Jones Industrial Average ETF (DIA) each retreated 0.4%. 

The producer price index (PPI) report came in line with economists’ expectations, as wholesale prices rose 0.6% in October. This translates into an 8.6% increase year over year, the highest annual pace in 11 years. Analysts will be keeping an eye on another key inflation indicator, the consumer price index (CPI) report, due out Wednesday. 

The chart below compares SPY with the U.S. Dollar Index (DXY) and State Street’s Gold Trust (GLD). The price of gold is not tied to the value of the U.S. dollar specifically. However, gold often exhibits a inverse correlation to the U.S. dollar and could be considered a hedge against inflation. 

Chart watchers will recognize that as SPY’s relative upward trend continues, so do the relative upward trends of both DXY and GLD. This lack of divergence could mean that inflation, while higher than usual, is pushing all asset classes higher. This could mean that while costs are increasing, the buying power of the dollar is rising in tandem, which could offset the harsher effects of inflation.  

2/ D.R. Horton Rises on Earnings Beat 

Shares of D.R. Horton (DHI) surged after the company reported better-than-expected earnings results for the fiscal fourth quarter. Analysts expected the homebuilder to announce $3.38 in earnings per share (EPS) and $7.77 billion in revenue; DHI reported $3.70 in EPS to go with $8.11 billion in revenue. While the housing market remains hot, multiple industries have been hamstrung by supply chain issues. Despite this, DHI managed to raise gross profit margin and increase its quarterly dividend. Investors approved, sending DHI stock up 5%. 

The chart below compares the recent performance of DHI with iShares’ U.S. Home ConThe chart below compares the recent performance of DHI with iShares’ U.S. Home Construction ETF (ITB). Home prices have remained elevated on increased demand and limited supply. This has been a boon for homebuilders; however, supply chain shortages and rising costs pose a challenge for bottom lines. DHI may have lagged ITB of late, but over the last year DHI has added 50% while ITB has gained 46%.  

With no signs of the housing market beginning to cool, the home building industry could continue to outperform the market. As one of the largest U.S. homebuilders, DHI may benefit noticeably from this environment.  

3/ Option Traders Bet on Disney

Although the stock is slightly down today, investors have recently bid the share prices of the Walt Disney Company (DIS) to an above average range ahead of the company’s fiscal fourth-quarter earnings announcement. Analysts expect DIS to report $0.44 in EPS and $18.8 billion in revenue Wednesday after the market closes. 

A key metric for DIS earnings will be revenue from its parks and related products. This segment is comprised of the company’s theme parks, resorts, cruise ships, and vacation clubs and is tied closely to the spending power of consumers in the U.S. and around the world. It is the second largest source of the company’s revenue (behind sports advertising). This segment was badly impacted by the COVID-19 pandemic. However, parks have been reopening, so it will be interesting to see how this segment affects the bottom line. 

Option traders appear to be bullish on the quarterly results, as recent trading volumes on Tuesday favor call option over puts nearly 3-to-1. This means that option traders are placing their bets that theme parks reopening could help DIS produce strong results for the quarter. 

4/ The Bottom Line 

The major stock indexes pulled back from highs even as inflation reports signaled caution for economic growth forecasts. Meanwhile, shares of companies in the homebuilder industry, such as DHI, and the consumer discretionary spending, such as DIS, sector showed resilience.

Originally posted on 9th November, 2021

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