Chart Advisor: Stocks Hit Resistance

Wednesday, 17th November, 2021

1/ Bond prices rise as stocks pull back

2/ Semiconductor industry on the mend?  

3/ Home Depot beats estimates

4/ The bottom line

1/ Bond Prices Rise as Stocks Pull Back

The benchmark S&P 500 index (SPX) pulled back after matching former highs yesterday. This happened even as several major retailers reported stronger-than-expected earnings. Nearly every major asset class retreated, except for the iShares 20+ Year Treasury bond ETF (TLT). While TLT saw a one-day increase, State Street’s S&P 500 Index ETF (SPY), Invesco’s DB Commodity Index Fund (DBC), and Invesco’s DB USD Index ETF (UUP) all appear to be on relative upward trends.  

Commodities and the U.S. dollar tend to have an inverse relationship, so when one rises, the other falls. As the dollar rises in value, it takes fewer dollars to purchase a commodity, and thus its price falls. A falling dollar is bullish for commodities and stocks, since both are dollar denominated.  

During periods of economic expansion, bond prices and stocks move in opposite directions as they compete for capital. So even though TLT was the only asset class to post gains today, the real story could be interpreted from a wider view. The relative upward trends of SPY and DBC implies strong economic expansion, while the added upward trend of UUP could imply that inflation is lifting all asset classes at the same time.  

2/ Semiconductor Industry on the Mend?   

Shares of Applied Materials (AMAT) are on an upward trend ahead of the company’s fiscal fourth-quarter earnings announcement, which is expected Thursday before the market opens. Analysts expect the company to report $1.96 in earnings per share (EPS) and $6.34 billion in revenue. As a supplier to chip companies, AMAT earnings could have big implications for the health of the semiconductor industry. Investors will be keeping an eye on how the company is able to manage supply chain issues as both a supplier and a vendor. 

The chart below compares the recent performance of AMAT with iShares’ Semiconductor ETF (SOXX). As illustrated on the chart, AMAT and SOXX have moved relatively in line with each other recently. However, over the past year, SOXX has added 52%, while AMAT has climbed nearly 110%. 

Option traders appear to be positioned for AMAT to rise after earnings. That’s because recent trading volumes for AMAT favored calls over puts at a rate of 2-to-1. While the open interest for AMAT features 189,000 calls compared to 272,000 puts, the single option with the highest open interest is the Nov. 19 $165 call. This represents a 6% upside in the current share price of AMAT, while straddle pricing implies a 4.3% move based on earnings.  

3/ Home Depot Beats Estimates 

Investors have bid up the share prices of Home Depot (HD) to new highs after the company beat Wall Street expectations for the third quarter. HD announced $3.92 in EPS and $36.82 billion in revenue, higher than the expected $3.40 in EPS and $35.01 billion in revenue. Same-store sales rose 6.1%, also ahead of analysts’ expectations, as a strong housing market continues to add to the strength HD stock gained during the COVID-19 pandemic.  

HD continues to outpace State Street’s Homebuilders ETF (XHB), as illustrated on the chart below. Both HD and XHB have been on a tear, adding 50% and 46%, respectively, year-to-date. Home prices have yet to significantly cool, which could continue to push existing homeowners to look toward home-improvement upgrades rather than moving. If this persists, it could help drive HD stock even higher than the recent highs that it achieved early in the trading session on Wednesday. 

4/ The Bottom Line 

Yesterday the S&P 500 index matched its previous highs from last week but pulled back today in a show of resistance. This may be part of the slow move upward for all asset classes during inflationary times. 

—

Originally posted on 17th November, 2021