Chart Advisor: Trending Up

Tuesday, 19th October, 2021

1/ Large-cap stocks lead higher 

2/ Earnings good, but investors unimpressed 

3/ What will Tesla tell us?

4/ The bottom line

1/ Large-Cap Stocks Lead Higher 

Major indexes continue to rise on the back of relatively strong third-quarter earnings reports. State Street’s S&P 500 Index ETF (SPY) and Invesco’s Nasdaq 100 ETF (QQQ) led the way higher, each adding 0.8%. iShares Russell 2000 ETF (IWM) added 0.4% and State Street’s Dow Jones Industrial Average ETF (DIA) rose 0.5%. Both DIA and SPY currently sit less than 1% from fresh highs. 

While earnings have been largely positive so far, most of the big-name companies have yet to report, and those that have are in industries that are perhaps less affected by supply chain bottlenecks, rising fuel costs, and inflationary concerns. Better-than-expected earnings could still provide downward moves if wider market issues have more of an effect on bottom lines than forecast, or if future guidance is lowered. However, it appears markets have been resilient toward a pullback.  

After a period of consolidation at the beginning of the month, it appears major averages are beginning to establish a new uptrend, perhaps forecasting a continued move to the upside for SPY and QQQ. Chart watchers will want to observe the price action in these indexes when the larger-weighted stocks begin to report earnings later this month. If traders don’t sell the shares down after earnings reports, it could suggest that the upward trend will continue through the fourth quarter.

2/ Earnings Good, but Investors Unimpressed 

Shares of tobacco giant Phillip Morris (PM) fell 1.3% despite the company announcing better-than-expected financial results for their fiscal third-quarter. PM reported $1.58 in earnings per share (EPS) and $8.12 billion in revenue, beating analysts’ forecasts of $1.56 in EPS and $7.93 billion in revenue. PM’s share price fell as the company said that the ongoing global semiconductor shortage could impact sales in the second half of next year. 

Analysts will be closely watching PM to see if the price action foreshadows what may happen to other companies faced with supply chain constraints, labor shortages, and increased shipping costs. At the moment, PM has fallen behind its sector, as illustrated on the chart below, which compares the recent performance of PM with State Street’s Consumer Staples Sector ETF (XLP). This sector is positioned to pass rising costs on to customers, making it less affected by inflationary concerns.  

After a smoking hot start to 2021 for PM, rising 20% in the first five months, the stock has fallen 5% this last month while XLP has remained relatively flat. However, it should be noted that PM fell less than it did after last quarter’s earnings, perhaps establishing a higher floor for the months ahead.  

3/ What Will Tesla Tell Us?  

One of the first major high growth tech companies to announce earnings will be Tesla (TSLA), which is scheduled to report Wednesday after the market closes. Analysts expect the car maker to report $1.64 in EPS and $13.9 billion in revenue. Investors most likely will focus closely on TSLA’s vehicle deliveries as the company needs to expand production to grow revenue and profits.  

Optimistic investors have bid TSLA shares up to a range well above the 20-period moving average. The stock has added 19% in the last month alone. TSLA’s strong performance has helped buoy Invesco’s tech-heavy Nasdaq-100 ETF (QQQ). One of the biggest TSLA bulls has been Ark Invest CEO Cathie Wood, whose ARK Innovation ETF (ARKK) holds nearly 2.5 million shares of the electric car producer.  

As seen on the chart below, TSLA remains well ahead of both QQQ and ARKK, which have added 2.5% and 3% in the last month, respectively. TSLA options are priced for the stock to continue to rise higher, however, and it should be noted that there are over 3 million put options in the open interest compared to 2.5 million calls.  

4/ The Bottom Line

Large-cap stocks pushed higher even as small-cap stocks lagged even though both asset classes are still trending higher. Phillip Morris beat earnings estimates, but investors still sold the shares after the news. TSLA decided to hedge their bets as the stock sold down mildly from its new highs today. 

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Originally posted on 19th October, 2021