By J.C. Parets & All Star Charts
Thursday, 27th October, 2022
1/ The Metaverse Has No Floor
2/ Energy Stocks Flex
3/ Caterpillar Inches Higher
4/ Lumber Hits the Deck
Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.
1/ The Metaverse Has No Floor
As big tech earnings continue to roll out, Meta Platforms (META) was the big story of the day. Shares of the parent company of Facebook and Instagram fell by almost 25% as investors reacted negatively to the latest earnings report, released after the bell yesterday.
Yesterday, we discussed the Online Retail ETF (IBUY) and how prior-cycle lows from 2018 and 2020 are increasingly coming into lay. Here is another example of that theme with META, shown in the chart below:
Unlike IBUY, which recently found support at this level, META printed a massive gap below its 2018 lows today. It is not uncommon to see price gaps form at key levels of interest like this one. In the case of today’s breakaway gap in META, an overwhelming amount of supply hit the market as buyers capitulated, causing support to break.
2/ Energy Stocks Flex
Investors continue to favor the energy sector, particularly energy stocks. The strength from these stocks refuses to subside.
What really stands out is their relative strength compared to energy contracts such as crude oil. The Energy Sector ETF (XLE) is making fresh six-month highs, while crude oil futures find support at their October pivot highs from last year.
Despite its recent relative weakness, crude oil could be poised to catch higher as it carves out a tradable low. This would make sense in light of the strength from oil and gas equities. However, the market has revealed that the best way to express a bullish energy thesis is through stocks. As long as this remains the case, there could be opportunities in the strongest names in the energy space.
3/ Caterpillar Inches Higher
One stock that has caught our attention this week is the industrial conglomerate Caterpillar (CAT). We think of CAT as a bellwether for the global economy. When the stock is rising, it’s usually an indicator that the economy and market are healthy.
The stock also gives us excellent intermarket information, as it is highly correlated with other risk assets such as emerging market equities (EEM), shown in black.
Similar to EEM, CAT was trading at its lowest level since 2020 a month ago. However, the stock recently reclaimed a key level at its 2018 highs and has rallied roughly 30% over the past month. Today, CAT gapped higher by nearly 8% on the heels of an earnings beat, closing at fresh four-month highs.
Bulls would like to see EEM stop falling and catch higher, repairing the current divergence with Caterpillar.
4/ Lumber Hits the Deck
The final months of the year favor lumber futures from the perspective of seasonality. Yet, lumber futures remain in a choppy market, near a critical shelf of former highs.
How it responds to this level in the coming weeks and months will carry valuable insight into the economy’s health and investors’ tolerance for risk.
If lumber trends below $500, it could be a strong recession signal. Risk assets could experience increased selling pressure under these circumstances.
On the other hand, if lumber futures can reclaim this key level and start trending higher, we could be in an environment that favors buying stocks.
—
Originally posted 27th October, 2022
Disclosure: Investopedia
Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: ETFs
Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.
