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Chart Advisor: Apple Pie

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Thursday, October 29, 2020 Headlines

1.Stocks rebound with Apple conspicuously leading the pack
2. Can the market rebound if Apple does not? 
3. Earnings setups and outcomes 

Market Moves

The S&P 500 (SPX) rebounded today, closing roughly 1.2% higher. Apple (AAPL) shares notably took a bigger piece of the market pie today, outpacing most other stocks by closing three percent higher ahead of its earnings announcement. Investors appeared to begin putting money into investments immediately after yesterday’s selling brought prices near three-month lows. At least that’s what the chart below seems to imply.

This chart is intended to help identify where money is flowing right now. Clearly the S&P 500 was on the rise, while the U.S. Dollar index (DXY) was also, but not Gold prices and not Bond prices. In the chart below these are tracked by State Street’s Gold Trust ETF (GLD) and iShares 20-year Treasury Bond ETF (TLT). If investors aren’t moving money into either gold or bonds, then they appear to be making tactical moves, rotating first to cash, and then into stocks once they find an opportunity they like.

This may be evidence that more investors are actively trying to time the market these days than in times past. That condition would likely lead to more volatility, which is rather problematic considering how close SPX is to establishing a downward trend. One close below the solid blue line on the chart would make it official.

Can the Market Rebound if Apple Does Not?

Investor reaction to Microsoft’s (MSFT) quarterly earnings report yesterday was surprisingly pessimistic considering the positive quality of the company’s news. Similarly, the market’s reaction to Apple’s earnings will likely influence where the market goes next. The company reported that they beat earnings and sales estimates and shared a positive outlook for the coming quarter, but shares still fell after hours. 

There can be no disputing the outsized influence on the market indexes these two stocks have. It is a foregone assumption that where Apple goes, the market will follow. To this point, as the chart below shows, AAPL shares have done a big part of the heavy lifting in market indexes since the pandemic broke. If investors’ reaction to the company’s quarterly report is so strongly bearish tomorrow (as it seemed to initially be right after the announcement), that will put heavy pressure on all major indexes at a critical time in the price action.

Earnings Setups and Outcomes 

All four of the major tech companies reported earnings after hours today. All four beat estimates for both sales and earnings. But only Alphabet (GOOGL) shares rose in the after-hours trading session. 

Consider the chart below which shows where option sellers predicted the moves could stretch over the next two days (red and green projection wedges). The last bar is the price move in the first 15 minutes after the company reported. This is a surprisingly strong show of investor pessimism, and it is unlikely to be overcome tomorrow.

The Bottom Line

Stocks rebounded somewhat today, though during the after-hours session, when the four major companies reported better-than-expected earnings, three out of four of them traded lower in the first few minutes. This dynamic seems to be a classic case of the buy-the-rumor-sell-the-news tactic that many professional investors employ. 

Originally Published on October 29, 2020

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