Chart Advisor: Trying to Rebound

Tuesday, 5th October, 2021

1/ Indexes rebound as large-cap stocks lead 

2/ Toyota traders optimistic despite drop 

3/ PepsiCo’s news gives investors staying power

4/ The bottom line

1/ Indexes Rebound as Large-Cap Stocks Lead 

Indexes rallied today, recouping nearly all of yesterday’s losses. The recently battered technology sector drove markets, with Invesco’s Nasdaq 100 ETF (QQQ) leading the charge, rising nearly 2%. State Street’s S&P 500 Index ETF (SPY) and Dow Jones Industrial Average ETF (DIA) both gained 1.5%. iShares Russell 2000 ETF (IWM) appeared poised to lead all indexes in gains, but a steep morning decline and small recovery saw the small-cap index rise only 0.5%.  

The Purchasing Manager’s Index report came in at a higher-than-expected 62%, as economic activity in the services sector grew in September for the 16th month in a row. Supply chain constraints continue to put pressure on nearly all aspects of the economy.  

Investors could be watching closely for a slew of jobs reports on Friday. The Federal Reserve has maintained that its current policy would remain in place until employment numbers can improve, which could put the stock market in a quandary. Employment numbers could improve, which normally signals a strong economy, but the market may react negatively if the numbers end up accelerating the pace at which the Fed tapers its bond purchases.

The chart below illustrates the recent performance of the major indexes. The abrupt downtrend during the month of September could be easing into a period of consolidation. This may be a sign of investors largely waiting for a better signal of which direction the market will move in the future.   

2/ Toyota Traders Optimistic Despite Drop

The share price of Toyota Motors (TM) fell to a below-average range after the automaker reported its U.S. September and third quarter 2021 sales results. As the automobile industry navigates supply chain issues and an ongoing chip shortage, TM reported a 1.4% increase on a volume and daily selling rate basis versus the same time period last year. Investors were nonplussed, sending the stock down more than 3% Monday, the day the report was released.  

The chart below compares the performance between TM and General Motors (GM) over the past month. While the auto industry has experienced slowdowns in production as a result of the semiconductor shortage, TM has managed to outperform its American competitor, GM.  

Toyota’s share price is trading well below its 20-day moving average, however, option traders appear to be positioned for TM to rise in the near term, as calls outweigh puts in the open interest 2.5-to-1. Recent trading volumes also point to option traders believing TM shares will skew higher, as calls were traded over puts more than 8-to-1 on Tuesday.  

3/ PepsiCo’s News Gives Investors Staying Power

Investors cautiously bid up the share price of PepsiCo (PEP) after its fiscal third-quarter earnings results beat expectations despite higher costs and supply chain snags. Analysts forecasted $1.73 in earnings per share (EPS) and $19.39 billion in revenue. PEP reported $1.79 in EPS and $20.19 billion in revenue. The beverage giant also offered higher-than-expected guidance for the future. PEP shares rose less than 1%. 

PEP has been on a relative downtrend recently, but has still managed to outperform its sector, as illustrated on the chart below. PEP has maintained a relatively comfortable lead ahead of State Street’s Consumer Staples Sector ETF (XLP). This sector is generally viewed as a safe haven during times of inflation because when the dollar weakens and consumer spending tightens, people will still need to buy necessities.  

4/ The Bottom Line

Stock indexes rebounded as large-cap stocks were leading and small-cap stocks were lagging. Toyota disappointed investors while PepsiCo gave out encouraging news. 

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Originally posted on 1st October, 2021