foxex: Not Flinching

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, July 27, 2020

1. Investors buy the dip despite selling signals

2. Watching for post-tech-sector potential

3. Will financial sector stocks join the fray?

Market Moves

Stocks continued to rebound today as investors seemed to shake off any worries about pending bad news later this week. Gold and oil prices, along with interest rates, also increased noticeably as the U.S. Dollar continued to weaken. The implication is clear: investors may not agree where to put their money to work, but almost none of them want to sit on the sidelines. Investors remain optimistic that they can find returns in the market one way or another.

This interpretation of market sentiment has important implications for the upcoming week as four key quarterly earnings are scheduled for Thursday and Friday (Facebook today changed from Wednesday to Friday). How investors react to these reports will set the stage for weeks to come.

The charts below compare how the four companies are positioned ahead of their respective reports. Notice in the first chart that Apple (AAPL) is unique in this group that includes Alphabet (GOOGL), Amazon (AMZN), and Facebook (FB). It is the only one that has broken its recent trendline so far. These trendlines are highly correlated. Each of them has a touch on either June 15 or June 29. These dates are significant to those fund managers who employ quarterly and semi-annual re-balancing strategies.

While trendlines are not actually predictive in nature, they make an excellent de-facto measuring tool. They measure the general consensus among investors about the rate of appreciation investors attribute to a given company and its stock. If price no longer follows the trendline, then it indicates that something has likely changed in the way investors value the stock. In this case it is prudent for chart watchers to ponder if AAPL is simply an early indication of what is to come to the other three.

However, the second chart below demonstrates another hypothesis: AAPL shares may simply have gotten a little too popular. After all, AAPL is by far the most widely held stock among most brokerage customers. This chart compares the relative strength of each of these stocks to Invesco's Nasdaq 100 index ETF (QQQ), and charts them on a scale where 100 means the stock is performing the same as the Nasdaq 100. Over the past 18 months AAPL shares have strongly outperformed all of the others. If investors don't like the quarterly report on Thursday, money may flow out of AAPL into one of the others of this group.

Watching for Post-Tech-Sector Potential
If investors are committed to finding returns in the equity markets, then it follows that additional possibilities beyond the tech-sector leaders could become more interesting to investors in the near term. The chart below features a few other possibilities including the non-manufacturing part of the automotive industry. AutoNation (AN), though it is an individual stock, makes for a good proxy here. Other candidates include: the Biotech industry, tracked by iShares' Nasdaq Biotechnology ETF (IBB); clean energy stocks, as tracked by iShares Global Clean Energy ETF (ICLN); and the homebuilding industry, as tracked by State Street's homebuilding industry group ETF (XHB).

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Will Financial Sector Stocks Join the Fray?

Another possibility to consider is whether the Financial market will kick into high gear and play catch up with the rest of the market. If this is going to happen the chart below points out that the two stocks already showing unusual strength are best poised to capture gains from such a move. These include ETrade Financial Corp. (ETFC) and MSCI (MSCI).

The Bottom Line

Investors resumed buying up stocks and commodities and seemed to hint they want to continue doing so. This week is pivotal to whether that trend will stay intact. If it does continue, then investors may change which stocks they favor. They may prefer to move money out of favorite stocks or sectors, and some potential replacements can be found in stocks which have already begun to surge recently.