Will Earnings From the “Big Four” Spark a Break From the Recent Range?

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Key Points

  • GDP Report and Claims Data Send Stocks Mostly Lower on the Day…
  • …But the “Big Four” Deliver After the Close
  • Large Cap Growth Set to Reassert Leadership?
  • Copper / Gold Ratio Continues to Fade
  • Futures Point to a Higher Open Today

Key Chart – iShares Russell 1000 Growth ETF (IWF)

Our view that “growth” (especially large cap) will reassert its leadership will likely be on display today after GOOGL, FB, AMZN and AAPL all beat earnings expectations last night. The iShares Russell 1000 Growth ETF (IWF) has a bullish rating and is leading the SPY. The OB / OS Indicator is in an oversold position and Chaikin Money Flow is bullish as the fund consolidates below the highs and above the rising long-term trend line. In a world where growth is scarce, growth stocks are likely to lead. 

Stock of the Day – Microsoft Corporation (MSFT)

Microsoft Corporation (MSFT) has a Bullish Chaikin Power Gauge rating and is leading the SPY. The stock is oversold based on our indicator and Chaikin Money Flow is bullish. MSFT is above the rising long-term trend line and has price-based support in the $195 – $200 range. The 21-day ATR is currently $5.25.

The Chaikin Power Gauge Rating for MSFT is Bullish due to very strong earnings performance, very positive expert activity and strong price/volume activity. The stock also has poor financial metrics. MSFT’s earnings performance is very strong as a result of high earnings growth over the past 3-5 years and an upward yearly earnings trend.

Pre-Market Movers

Advancers: UA (13%), AAPL (7%), ATUS (6%), FB (6%), AMZN (5%)

Decliners: TEAM (6%), ALK (4%), EXPE (3%), TWOU (3%), GILD (3%)

Market Commentary/Looking Ahead

US equities were mostly lower in Thursday trading. Second quarter GDP came in at an astonishing decline of 32.9 q/q SAAR while initial and continuing claims moved higher again. Treasuries were stronger with the curve flattening. The dollar was weaker on the yen and euro crosses. Gold finished down 0.6% after eight straight sessions of gains. WTI crude settled down 3.3% to finish below $40/barrel.  

The question of the day is will better than expected reports from GOOGL, FB, AMZN and AAPL propel the SPY from the range that has been in place since June 9th? The case can be made that the setup is more compelling now as the OB / OS Indicator is closer to an oversold position. Chaikin Money Flow has been increasing of late which is also a positive sign. Our view remains that the February highs are in play as long as SPY is above the $300 – $310 zone.   

S&P futures are up 0.1% after Asian markets were mostly weaker overnight. European markets are seeing good gains after the STOXX 600 fell the most in over a month on Thursday. Treasuries are stronger across the curve. The dollar is weaker vs yen and euro and the dollar index is on track for its biggest monthly decline in a decade. Gold is up 1.5%. WTI Crude is up 0.3%.

Key Themes and Relationships

High Yield vs. Treasuries

The relationship between high yield bonds (HYG) and intermediate term treasuries (IEF) continues to trade below the 200-day moving average and test the 2016 lows. The RSI is in a neutral position after becoming overbought on the rally attempt. This ratio remains in a bearish trend. The question is, will investors begin to “reach for yield” after the Fed promised to maintain an extremely low level of interest rates for the foreseeable future? 

Small Caps Relative to the S&P 500

The iShares Russell 2000 ETF (IWM) remains in a downtrend vs the S&P 500, below the declining 200-day moving average and remains well below broken support. The RSI is moving higher but remains in a bearish regime. We continue to favor large caps over small caps in the current environment. 

Consumer Discretionary Relative to Consumer Staples (Equal Weight)

The ratio of consumer discretionary stocks relative to consumer staples stocks continues to trade below the declining 200-day moving average as it tests an important support / resistance zone. The RSI may be in the process of shifting to bullish ranges. Continued improvement here would be a sign that investors are willing to take on more risk, a breakdown sends the opposite message. We use the equal weight ETFs to account for AMZN’s size in the discretionary space. 

Semiconductors Relative to the S&P 500

The VanEck Vectors Semiconductor ETF (SMH) remains in an uptrend relative to the S&P 500. The ratio is above the rising 200-day moving average and traded at a new high yesterday, on the back of strong results from QCOM, while the RSI is holding bullish ranges. Generally, when the semiconductors are leading the market, it is a bullish datapoint for equities.  

High Beta Relative to Low Volatility

The Invesco S&P 500 High Beta ETF (SPHB) relative to the S&P 500 Low Volatility ETF (SPLV) is above the 200-day moving average. The RSI is holding bullish ranges after becoming overbought for the first time in more than two years. Should this ratio begin to move higher, it would be a sign of increased risk appetite on the part of investors. 

Growth Relative to Value

The iShares Russell 3000 Growth ETF (IUSG) is pulling back relative to the iShares Russell 3000 Value ETF (IUSV). The ratio remains extended above the 200-day moving average, though less so than a few weeks ago when we noted that it would not be a good idea to chase. The RSI is holding bullish ranges during the consolidation which increases the odds that the trend will resume to the upside. 

FAN-MAG Stocks*

The FAN-MAG Index that we have built is consolidating an extended position relative to the 200-day moving average. On a relative basis (vs the S&P 500), the group is holding above the breakout level. Last night after the close, GOOGL, AMZN, AAPL and FB all reported earnings that exceeded expectations and traded higher, creating the potential that the reports serve as a catalyst to reignite the uptrend of this index as well as for the growth / value relationship. 

*I do not take credit for the name as I heard it while listening to Bloomberg Radio

Copper Relative to Gold

The ratio of Copper to Gold continues to fade from the declining 200-day moving average.  The RSI is moving lower from an overbought condition and is on the verge of breaking the lower bound of bullish ranges. This is a key measure to watch for a read on the growth vs value trade. Further weakness here would signal a likely shift back to the growth leadership which has been in place for more well over a year.       

Take-Away: The key ratios and relationships that we track to gauge the level of risk appetite in the market remain mixed this week. The earnings reports from the “Big Four” last night should serve as a spark for a continuation of leadership on the part of growth over value after a brief rotation. This is especially important as the Copper / Gold ratio fades from moving average resistance. 

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Disclaimer

Disclaimer: Chaikin Analytics LLC is not registered as a securities broker-dealer or advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Chaikin Analytics does not recommend the purchase of any stock or advise on the suitability of any trade. The information presented is generic in nature and is not to be construed as an endorsement, recommendation, advice or any offer or solicitation to buy or sell securities of any kind, but solely as information requiring further research as to suitability, accuracy and appropriateness. Users bear sole responsibility for their own stock research and decisions. Read the entire at www.chaikinanalytics.com/disclaimer

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