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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, April 09, 2020

1. Financial sector jumps as stocks pause for earnings

2. Uncertainty creates opportunity in financial sector

3. Real Estate sector staging a stealth rebound

Market Moves

U.S. stock indexes rallied at the end of today's session, while finance sector stocks surged even more. State Street's Financial Sector index ETF (XLF) closed higher by over five percent, establishing an upward trend in the price action since its lows on March 23rd. By comparison the S&P 500 index (SPX) closed over one and a half percent higher, though the Nasdaq 100 index (NDX) closed little better than unchanged.

These moves were different from what has typically been occurring over the past three months, where technology-oriented stocks would outpace others. This action implies that the rally is becoming broad based, and increasing its likelihood of continuing. However, a lot can change depending on what comes out of the earnings reports of several financial companies next week, and how analysts interpret that information.

Uncertainty Creates Opportunity in Financial Sector

When J.P. Morgan Chase (JPM) reports quarterly earnings on Tuesday before the market opens, it will be the first major indication of what U.S. companies are facing from the impact of the COVID-19 pandemic. As the chart below depicts, JPMorgan's rebound today breaks out of a consolidating double-bottom type of pattern.

What is perhaps more interesting is that option sellers are predicting a 9 percent move, either up or down, depending on whether the company beats estimates and offers optimistic guidance. The typical movement for JPM shares is around two percent. Part of the change has to do with the added volatility in the markets right now, but it is also true that open interest favors call options over put options by a two-to-one margin. Since option buyers are so bullish on JPM, it has likely increased the option premium to a degree that is higher than normal.

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Real Estate Sector Staging a Stealth Rebound

Two additional sectors showed strong performance today other than the financial sector. Both healthcare stocks and real estate stocks moved strongly higher. The real estate sector moves are interesting because these companies were hit hard in the downtrend. Investors and analysts expected that consumers might begin skipping rent or mortgage payments, and that the defaults could create a devastating impact on both this sector and the financial sector.

Today's moves appear to indicate that investors have begun to consider this outcome far less likely. Time will tell whether that sentiment is premature. Meanwhile, both the commercial real estate industry, as tracked by State Street's Real Estate sector index ETF (XLRE) and the residential real estate industry, as tracked by State Street's Homebuilder index ETF (XHB), are trending into an upward move. Perhaps even more interesting is the move of American Tower (AMT) shares. This company is already hitting new highs for the year. This Real Estate Investment Trust (REIT) focuses its assets on renting out communications towers, making it a magnet for the benefits from both emerging 5G technology and lower interest rates.

The Bottom Line

While oil prices resumed their strong drop in price, stocks rallied. Led by the financial and real estate sectors, the move implies less risks to come for investors. These moves are heavily influenced by the anticipation of good news from the financial companies which will report quarterly earnings next week.

Programming Note: Since U.S. markets are closed in observance of Good Friday, the Chart Advisor will not publish April 10th, but will be back on Monday April 13th. Stay safe and enjoy the long weekend.