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Chart Advisor: On Deck

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Friday, October 23, 2020 Headlines

1.Money managers gearing up for post-earnings moves
2. Utilities sector surge shows caution
3. How the most influential stocks are positioned

Market Moves

Stock market indexes held within a tight range to end a week of declining volatility. One of the reasons for this could be that the heaviest week for corporate earnings reports is just ahead. Investment professionals rely heavily on news from companies’ quarterly statements to help them make strategic decisions about where to put their money. Once they have enough information, they execute a strategy.

The chart below shows how this played out just three months ago with some rather dramatic examples. Earnings season began last quarter early in July, but by the end of the month the majority of the S&P 500 and the Nasdaq 100 had reported. Notice how State Street’s S&P 500 index fund (SPY) and Invesco’s Nasdaq 100 fund (QQQ) began to rise significantly at the beginning of August. State Street’s Gold Trust ETF (GLD) and iShares’ 20-Year Treasury Bond ETF (TLT) also began to drift lower at the exact same time. This is an excellent example of how money can move from one asset class to another once investors begin to execute their chosen strategies.

[NEW READER SURVEY: We are running another two-week survey of our U.S.-based readers to gauge your sentiment as the election approaches. We’ll share the results, as always, and we thank you for your time and participation.]

Utilities Sector Surge Shows Caution

The mood of market participants right now is a bit less adventuresome than it was three months ago. The chart below shows a comparison of all of State Street’s Sector ETFs. The ones that should capture chart watchers’ attention right now are the two at the top. The thick dark purple line tracks the Utilities (XLU) sector while the thin purple line traces the Consumer Discretionary sector (XLY).

Utilities stocks have low volatility and typically pay nice dividends. These are considered to be defensive investments, and they tend to outperform the market when investors are uncertain. It is no surprise that investors feel uncertain now before the current election. However, the earnings reports that will be released next week will have to have enough good news to counter the general sentiment of caution being shown in the markets right now.

How The Most Influential Stocks Are Positioned

As investors and analysts pore through the details of the quarterly reports, they will be faced with a decision about when to act. The tipping point for most investors watching earnings announcements is usually the week when the FAANG stocks report. That’s next week.

The chart below shows how each of the most influential stocks in the Nasdaq 100 are positioned going into next week. Three of the four, Microsoft (MSFT), Apple (AAPL), and Amazon (AMZN) have drifted lower during the last week. One stock, Alphabet (GOOGL), has been riding the wave of news reports surrounding the U.S. election. This flurry of activity seems to be driving investors to the stock. Some believe that the additional traffic searching for various political news will translate into financial gain. Once Alphabet has reported its earnings, most companies in the benchmark indexes will have published their quarterly results, and investors will begin their moves. These charts don’t reflect a lot of optimism just yet.

The Bottom Line

With a new earnings season comes a new crop of investor decisions. Once the biggest companies have reported, the price action tends to trend in one direction or the other. The tipping point occurs when the most influential companies have reported. That will occur by next Friday this time around.

Originally Published on October 23, 2020

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