Chart Advisor: Tech Powers Ahead

Friday, 12th November, 2021

1/ Nasdaq leads indexes in a rebound 

2/ Tyson traders and investors both nervous 

3/ Investors putting wants over needs 

4/ The bottom line

1/ Nasdaq Leads Indexes in a Rebound 

Stocks rose to close out the week, but major averages are on pace to finish the week lower. Invesco’s Nasdaq 100 ETF (QQQ) led the way higher, adding 1%. State Street’s S&P 500 Index ETF (SPY) and Dow Jones Industrial Average ETF (DIA) gained 0.7% and 0.5%, respectively, while the iShares Russell 2000 ETF (IWM) added 0.1%.  

The University of Michigan’s Consumer Sentiment report came in at a 10-year low in November as inflation continues to rise. The report can be a leading indicator of consumer spending. Meanwhile, the U.S. Labor Department’s Job Openings and Labor Turnover Survey showed that workers left their jobs in record numbers in September, with 4.43 million people quitting. The report cited 10.44 million employment openings for the month.  

Despite continued and increasing concerns over inflation, major indexes remain close to record highs. The last sharp pullback for major averages was in early October, as illustrated on the chart below. Chart watchers can recognize that averages moved significantly higher from that point to today. This means that the recent pullback could merely be a springboard into a move higher.  

2/ Tyson Traders and Investors Both Nervous 

Investors have sold the share prices of Tyson Foods (TSN) ahead of the company’s fiscal fourth-quarter earnings report, which is expected to be announced Monday before the market opens. Analysts expect the company to report $2.22 in earnings per share (EPS) and 12.69 billion in revenue. With the restaurant industry reopening, the food service business is expected to see a rebound, and the company expects to see escalated volumes above pre-COVID levels in the retail business for the rest of the year. 

The chart below compares the recent performance of TSN with State Street’s Consumer Staples ETF (XLP). TSN has outperformed XLP on a wider basis, as TSN has gained 27% year-to-date, while XLP has added only 9% in the same span. The chart also highlights that today’s 2.8% share price decline places TSN shares just below their 20-day moving average, leaving the stock in the middle of the volatility range.  

At first glance, it appears option traders are placing their bets for the stock to move higher in the near term. That’s because recent trading volumes favor call options over puts more than 7-to-1. The open interest for TSN features over 89,000 calls compared to nearly 84,000 puts, and implied volatility suggests that option traders are selling puts. Even though the open interest is more even than recent trading volumes in relation to calls and puts, it appears option traders are taking advantage of elevated premiums ahead of earnings to take relatively bullish positions.  

3/ Investors Putting Wants Over Needs 

The chart below compares SPY with State Street’s Consumer Staples Sector ETF (XLP) and Consumer Discretionary ETF (XLY). Comparing these two sectors can give a good benchmark of “wants versus needs”, which can gauge the strength of the retail sector ahead of the upcoming holiday season. During times of high inflation, XLP is generally considered to be a bit of a safer bet than XLY, as consumers will spend more on things that they need rather than things that they want.  

XLY has been moving relatively in tandem with SPY’s recent upward trend, while XLP’s upward movement has not been as steep. Despite inflation reports continuing to come in higher and higher seemingly every month, investors had yet to rotate sectors until recently.  

XLY has diverged from SPY. The index bounced back a little from its recent pullback, but XLY has fallen sharply. However, this hasn’t coincided with a similarly sharp upward move from XLP, which could mean that while signs of a shift of “wants versus needs” could be developing, there could be some time before the two sectors converge on opposite paths.  

4/ The Bottom Line 

Nasdaq stocks led other indexes in rebounding from the week’s dip. Investors seem worried about Tyson Foods’ earnings report, but it may be just part of a shifting preference from the consumer Staples sector to the consumer discretionary sector.

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Originally posted on 12th November, 2021