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Chart Advisor: Anticipating Earnings

Investopedia

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Investopedia
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Monday, April 12, 2021

1/ Markets expect good news from large companies 

2/ Big tech suppliers suggesting weakness? 

3/ TSLA teases new upward trend 

4/ The bottom line

1/ Markets Expect Good News From Large Companies 

Investors seem to be assuming unusually divergent expectations for large companies in comparison to small companies. This is likely related to the fact that many prominent large companies are preparing to release their quarterly earnings statement in the next three weeks. The impact is that large-cap stocks have been outperforming small-cap stocks over the past month. 

The chart below compares State Street’s S&P 500 Index ETF (SPY) and iShares’ Russell 2000 Index ETF (IWM). Each of them features a technical study known as the Choppiness Index in the panel below the price charts. This indicator goes higher if the price action shows less direct trend action over the previous two weeks.  

This comparison shows that SPY is showing more trendiness in its price action, while IWM is showing less. This mixed signal likely tips the hand that investors expect large companies to have down well in the first quarter of 2021 and that their earnings will reflect this. However, IWM shows the kind of price action that investors may revert to if their expectations are not met. 

2/ Big Tech Suppliers Suggesting Weakness? 

Invesco’s Nasdaq 100 ETF (QQQ) has a high degree of correlation to the Hang Seng Index (HSI) and the forex currency pair featuring the Australian Dollar and the Japanese Yen (AUDJPY). It is unlikely that the Nasdaq 100 can continue higher if both of these asset indexes are moving lower. The chart below details the comparison between these three and shows that this divergence has persisted for a few weeks.  

This becomes more interesting as chart watchers stop to consider the fact that many big tech companies in the Nasdaq 100 have suppliers in the Southeast Asian region. This ongoing divergence may be a signal that suppliers are forecasting lower performance in the near future.  

3/ TSLA Teases New Upward Trend 

The third chart below shows how optimism wins the day for Tesla (TSLA) shares as the stock closes above $700 per share. The Choppiness Index broke through the level made by previous lows, suggesting that the stock is beginning a new upward trend. That becomes important because TSLA shares represent the intersection of a big technology company and the hopes of highly speculative traders. 

4/ The Bottom Line 

The S&P 500 closed near its all-time high, even as the Russell 2000 floundered and failed to move out of its trading range. This price action may be the market’s way of discounting the prospects for newer, smaller companies as we head into earnings season.

Originally Published on April 12, 2021

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