foxex: Apple Thunder

Chart Advisor | Focus on the Price

Tuesday, January 28, 2020

1. Apple's earnings report will likely shake the market

2. Pharma stocks tiptoe higher

3. Coronavirus influences all sectors

Market Moves

Stocks and oil prices rebounded somewhat while bond and gold prices retreated. Perhaps the biggest news came after the closing bell as Apple (AAPL) reported earnings and dramatically surpassed expectations despite a big run up in the share price during the final quarter of 2019.

The S&P 500 (SPX) closed one percent higher on the day while the Nasdaq 100 (NDX) closed 1.5 percent higher and the Dow Jones Industrial Average (DJX) closed .66 percent higher. This rebound didn't replace all of the downward gap evident over the weekend as the news of the acceleration of Coronavirus cases broke, however it did show that investors are still eager to put their money to work in the markets.

That's why the Apple earnings report is so important. Apple is a component of all three major indexes. It is represented in over 300 exchange-traded funds and over 500 mutual funds as well. It's safe to say that what happens to Apple shares has an impact on all corners of the market. The chart below shows price levels where options market makers priced the anticipated move of AAPL shares. These estimates, based on sales of options and the resulting prices of those options, called for a 17 dollar move higher on good news.

Analysts also expected Apple's news to be positive, but the details were surprisingly good. In the first five minutes after the news broke traders took the price right to the level of option pricing for good news. How the market follows this initial reaction will be a good indication of what the investors will do over the next month.

Pharma Stocks Tiptoe Higher

Pharmaceutical stocks fell dramatically lower over the past week and Monday, only to rebound slightly yesterday and today. The chart below shows how State Street's pharmaceutical index ETF (XPH) traded on today and yesterday's news. The importance of this information is that it does not reflect what the market knows, but rather what the market does NOT know.

News from China was that the number of known cases had quadrupled over the weekend, with rumors that the numbers were wildly understated. So some investors may wonder why stocks rose, even though the news today featured additional increases in the number of known cases and the reported death toll.

The answer is that investors don't like what they don't know about and therefore imagine the worst. What actually occurs is not typically the worst of all possible outcomes, so the market rebounds from such extreme price action. Which explains why some strategies typically encourage buying stocks on such pullbacks.

Read more:

Tesla Earnings: What to Look For

3 Biotech Stocks Nearing Support Amid Pricing Policy Uncertainty

Chipotle Earnings: What to Look For

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Coronavirus Influences All Sectors

Commodities are responding to the Coronavirus news with mixed reactions. Gold (GOLD) retreated today while oil (OIL) prices rebounded a small bit (see chart below). This divergence is no surprise to chart watchers who recognize that Gold is often a hedge for safety, while oil is a risk asset priced based on consumer demand. What will be important to watch, however, is whether these commodities will continue to diverge. Once they stop diverging, it may be fair to say that the Coronavirus scare will effectively be over so far as the market is concerned.

The Bottom Line

Stocks staged a healthy rebound today, while gold prices fell significantly and oil prices rose slightly. These moves were largely a reflection of investor attitudes towards what is known (or not) about the Coronavirus. Meanwhile Apple's earnings report was so good that it may give investors hope to buy more shares tomorrow.