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TECHNOLOGY AND CONSUMER DISCRETIONARY LEADING RALLY INTO EARNINGS

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The market has spoken.  If you're looking for nice earnings surprises for the third quarter, or perhaps raised guidance on a forward-looking basis, look no further than the technology and consumer discretionary sectors.  This past week, we saw a very positive earnings report from Google (GOOG), while commodity player Alcoa (AA) and behemoth financial JP Morgan (JPM) both came up short of expectations.  Given the way that the various sectors have been trading, you might expect more of the same over the next few weeks.  While the overall market may seem directionless with wild swings higher and lower the last several weeks, technology and consumer discretionary have emerged as the relative leaders among the nine sectors.  That's where the money is flowing on a relative basis.  Utilities had been performing quite well, but the sudden surge in interest rates and equity prices the past couple weeks has lessened their appeal on a relative basis.
 
One look at the chart below and it's obvious what the market is expecting during earnings season:

S&P 500 10.15.11

Technology and consumer discretionary are outperforming and there's only one way to interpret this.  Those who research these companies and interview management believe these are the two areas where we'll see the best earnings reports and biggest positive surprises.  GOOG was the first example.  Financials are the primary laggard as money has continued flowing out of the sector during the third quarter.  JPM may have served as the poster child for the group with an underwhelming quarterly report this past Thursday.
 
The relative strength in banks and brokers can be seen in the next two charts:

$BKX 10.15.11

$XBD 10.15.11

Don't expect much out of these two industry groups as earnings are released because the market is pricing in some very poor results.  I want to see some relative strength (ie, improving technicals) before I'd consider the financial sector as a place to invest.
 
Historically, the market doesn't perform very well when the influential financial sector is underperforming.  That means that you'll need to be very selective on the long side within areas of the market where the money is currently flowing.  Given Friday's weak breakout volume, I'd remain quite cautious.
 
I write a daily Market Chatter piece that's provided to our members at Invested Central and covers such areas as price/volume analysis, MACD, other momentum oscillators, historical market tendencies, sentiment indicators (including my own equity only put call ratio - EOPCR - analysis), sector analysis, individual stock trade setups and a final summary.  I'm making the Market Chatter available to all ChartWatchers' readers through the end of October at no cost.  Click here to register.
 
I'm also very excited to announce that I'll be making my first trip ever to the Great White North to speak to the Calgary Chapter of the Canadian Society of Technical  Analysts on Saturday, November 5, 2011 and Tuesday, November 8, 2011.  Greg Schnell, author of The Canadian Technician Blog here at StockCharts and Director of the Calgary Chapter of the CSTA, will join me.  Everyone is welcome and I'll be providing details on our website very shortly.  Click here for our list of Events.  I'd love to see you there!
 
Happy trading!

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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