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Chart Advisor: Rebound Stalls


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Wednesday, 6th October, 2021

1/ Tech index leads lower 

2/ No cheers from investors for Constellation Brands 

3/ ConAgra has traders nervous ahead of earnings report 

4/ The bottom line

1/ Tech Index Leads Lower 

Markets appeared positioned for a reversal of yesterday’s gains, as major indexes opened to more than 1% losses each before staging a late session rally to finish relatively flat. State Street’s Nasdaq 100 ETF (QQQ) led the way higher, gaining 0.6%, while iShares Russell 2000 ETF (IWM) lagged, falling 0.6%. The late comeback could be a result of news that Congress is making significant progress toward a short-term debt ceiling extension, which could help the U.S. avoid a first-ever debt default expected on Oct. 18. 

September’s ADP nonfarm employment change report came in higher than expected. This report, which provides an early look at employment growth ahead of government-released employment data, showed that private companies hired at a faster rate than expected last month. Jobs rose by 568,000 in September, higher than the 425,000 estimate.  

The beleaguered tech sector has underperformed of late, dragging markets with it, as many of the high-valuation companies in the sector comprise large percentages of major indexes. Despite this, the tech heavy QQQ has outperformed the Dow Jones Industrial Average ETF (DIA), as illustrated on the chart below.  

These indexes carry a few of the same holdings, albeit with different weightings. QQQ remains in the lead, which could mean that despite recent pullbacks in the technology sector, fears regarding inflation have not convinced the bulk of investors to seek safe haven in more defensive stocks.   

2/ No Cheers from Investors for Constellation Brands 

Investors slightly bid down the share price of Constellation Brands (STZ) after the beverage distributor lagged earnings per share (EPS) estimates, but exceeded revenue expectations in the company’s fiscal second-quarter earnings announcement. Analysts forecast $2.78 in EPS and $2.31 billion in revenues. The company reported $2.38 in EPS and $2.37 billion in revenues, as sales benefitted from double-digit net sales growth for their beer business. Some profit taking took place as the stock fell less than 1%. 

STZ has relatively lagged its sector this year. The chart below illustrates this relationship, comparing STZ with State Street’s Consumer Staples Sector ETF (XLP). While XLP has risen 4% year-to-date, STZ stock has fallen 2% in the same time span. Even as STZ shares edge lower, investment bank Credit Suisse recently noted the company as one of the leading stock picks for Q4, quoting high beer profit margins and an upside in the wine business.  

3/ ConAgra has Traders Nervous Ahead of Earnings Report 

Also falling slightly was packaged food company Conagra Brands (CAG), which is due to report its fiscal first-quarter earnings results tomorrow before the market opens. Analysts are expecting $0.49 in EPS and $2.53 billion in revenues. As supply chain constraints and increased shipping costs continue to damper earnings expectations across nearly all sectors, inflationary concerns place the focus squarely on profit margins. 

Below is a comparison of the recent performance between CAG and Invesco’s DB Agriculture Fund (DBA), which tracks an index of 10 agricultural commodity futures contracts. This ETF can be viewed as an inflationary hedge, because no matter how much prices rise, people need to eat. Recently CAG has lagged well behind DBA. Over the last year, CAG has fallen 7%, while DBA has risen 30%.  

Option pricing for CAG currently implies a 4% post-earnings move. The open interest for CAG features nearly 40,000 calls to over 32,000 puts. However, today’s trading volumes favor calls over puts more than 2-to-1. It should be noted that the $32 put options, which expire on Friday, have the highest amount of open interest for options expiring this week, with over 3,100 contracts open at this strike. 

4/ The Bottom Line 

Stock indexes opened lower and traded flat. The action put a pause on the rebound staged by stocks over the past two days. Investors may be reluctant to commit themselves before the nonfarm payroll report due Friday.  

Originally posted on 6th October, 2021

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