What I'm looking at this week in the market

Today I'm going to go over what I'm looking at as we approach earnings season, with the Nasdaq at all time super-hyper-mega highs, CoVid19 cases spiking, heat waves across the US and The UFC dominating sports!

I will be doing a livestream for the members of the Trading Lab only going over everything in this email along with my process and we'll be looking at possible outcomes. We'll be digging in to the individual sectors to identify different stocks for our watch list heading in to earnings. 

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Though I don't spend a lot of time trading individual equities, earnings season is upon us. My approach to markets are to focus on quantitative strategies, and sprinkle a little discretionary on top of it according to the market regime.

A catalyst or news, is what brings the most participants into a given asset, be it a currency, commodity, or individual companies stock. So being aware of KNOWN news events as they approach is a lovely tool to stack on top of a quantitative strategy. 

Earnings season, for example, is a know day/time (usually) when a catalyst will happen. This is the core element of the Equity Earnings Strategy which only trades 4 times per year, inside of a 2 week long window +/- each quarter. That is there are only about 8 weeks that I trade the equity markets and I leave the rest alone. 

Earnings season has effects across the entire economy, not just for individual stocks. Whether it be a Central Bank easing or tightening interest rates, a sector increasing production of materials and goods, company mergers and acquisitions, increasing oil production, earnings are a major input for all asset classes directly or indirectly. 

So let's dive in to the S&P 500 ETF Sectors and see where we stand quantitatively...

First off is the S&P 500 Itself to take a look at the "market" overall

$SPY S&P 500

Currently $SPY is in a neutral market regime by way of SQN measurement, while the ATR is casually drifting lower. This is more bullish than bearish and waiting for a reason to become more bullish or just flat out neutral.

Price is in a compressed vol setup which compressed vol precedes expanded volatility, and here we are.

SPY appears to be waiting for a catalyst, a reason to push higher. This seems exactly right, it is where it should be. Not exactly illuminating on a trade idea but it favors sideways to higher prices.

$XLE the energy sector ETF

For the $XLE the market regime is bear quiet with declining ATR meaning lower volatility. This implies the larger trend tends to be in control which despite this bounce has been downward since the 2014 $100 peak

As a sector there is not much of a quantifiable edge using the tools we use here. Pass

$XLU Utilities

Like Energy, Utilities are in a bear quiet regime with declining ATR suggesting sideways action or the direction of the longer term trend. Here's a longer term chart of XLU

As you can see, the trend is decidedly higher over the long term. This would suggest a possible upside continuation of that trend and we might get a more positive outcome this earnings season. Will keep an eye on this one.

$XLK tech sector ETF

It should come as no surprise to anyone here that the Tech ETF is this bullish looking. By regime it is in a neutral regime, close to flipping bull quiet with declining ATR suggesting that the overall trend will continue. 

Here's some nuance to tech, it's basically 5 big companies that have Trillion Dollar plus valuations that get all the headlines about sucking all the capital out of the market. While that's true you can have a look across many (most) tech companies in the index and most are performing rather well with the sector.

If you are paying attention to the news here you might find yourself surprised with better than expected price reaction to the upside, regardless of the news itself. 

This is the sector I'm likely to be trading this season.

$XLB Building Materials

Building Materials ETF is in neutral market regime with declining ATR suggesting the long term trend will return and remain in tact, which is up long term and sideways since 2018

This isn't extremely decisive but implies the surprise might be to the upside regardless of the news these companies report. I might be looking for weakness ahead of earnings on individual names in this sector to get an over reaction and catch a mean reversion trade out of it. 

I will be watching this sector.

$XLP Consumer Staples

Regime type is Neutral while the declining ATR suggests the longer term trend will continue to play out. 

This looks like a prime candidate for mean reversion trading for the near term, so I'd be on the lookout for over reactions to fade. 

Looking at the longer term, I'd certainly favor any negative over reactions in order to get me long that beast of a long term trend!

$XLY Consumer Discretionary 

By way of market regime we are Neutral with a bullish twist! The ATR suggest the longer term trend is in tact, meaning sideways on this chart but the long term chart shows no end in sight

Again any negative news and lower price action is an excuse to buy. 

Keeping an eye on this one

$XLI Industrials

For Industrials the market regime is bear quiet, I'd expect this sector to take more of a beating or bang around sideways than put in a power move higher. The ATR suggest longer term trend is in tact which is, as you guess it, bullish.

As a sector I'd expect bad earnings reports to have negative reaction and positive reports AND news to under react to the upside if at all. 

This one is not for me

$XLC Communications

Market regime is neutral to bullish, with tickers like $FB $TWTR $GOOGL in this sector you can expect some volatility here, and the whole world to be playing these earnings announcements. The ATR is starting to rise ever so slightly suggesting that volatility might be heading our way. 

The longer term trend in this sector is rising so weakness would be an opportunity to buy, but just be prepared for some headline risk and the news to cover these names more than most. 

Expect positive reaction to negative news, positive reaction to positive news and even if there is negative news, look for mean reversion setups to get long. 

Obviously this is a sector to keep an eye especially if it flips to Bull Quiet. 

$XLV Healthcare ETF

Market regime is neutral to slightly bullish, meaning it could flip to bull quiet this earnings season. Keep an eye on that. The ATR is declining suggesting the longer term trend (higher duh) is likely to be in charge. 

Weakness can be bought but I'll be waiting for a Bull Quiet regime before I get into any of these companies. 

Of note is the Bull Volatile back in Q1, this is a requirement for a major top in prices. Obviously that happened and we have since recovered banging around sideways at all time highs. The long side is favored on weakness.

$XLF FInancials

These financials have been talked about a lot and everyone is expecting boat loads of drama, so you should expect the underlying's in this sector to be covered extensively in financial news. 

XLE is in a bear quiet regime with no inclination to turn bullish or bearish from here. With a declining ATR we'd be looking for the long term trend to continue to play out here as well. 

The longer term chart is trending higher but has basically traded sideways since 2017, which is what I'd expect to continue.

There's no advantage in Financials this earnings season but headline traders/gamblers will likely pile into these as financial news does like to cover their advertisers (financial firms) when they can. Likely negative price outcomes on positive and negative news will be the overall trend here. 

Avoid!

$XLRE Real Estate

The Real Estate index looks identical to financials, big surprise there. 

The market regime is bear quiet which favors negative price outcomes to both positive and negative news. The ATR declining suggest continuation of the trend which looking at a longer term chart (XLRE only began trading in 2016 so not that long term), looks to be sideways action.

I'd expect a lot of coverage and focus on Real Estate like financials. The current narrative is single family homes are safe and bullish, multi-family projects are questionable as people are leaving cities to avoid CoVid19 problems in cities and Commercial Real Estate is dead. 

Whether that's the reality or not is not what I'm looking at here, just that there will be a lot of focus by financial media to cover that story, because everyone is worried about their homes and speculative investments in these mega apartment/retail projects.

Avoid!

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After reviewing all of these, the thing that stands out to me is that tech should continue to lead.

There is a major narrative about rotating out of the FAANGM stocks into the rest of the S&P500 which I believe a lot of participants have gotten themselves positioned for which means that if it doesn't happen, they'll have to rotate back into FAANGM symbols, chasing new all time highs. 

Finally, the seasonality of the equity markets over time shows weakness from June to October, we are heading face first into this earning season smack dab in the sideways action. Interesting that nearly all the S&P Sector ETF's (not including tech) are banging around sideways, just like this chart.   

Also here's a quick daily review of Copper, Nat Gas, Euro, Franc, BTC via Twitter if you missed the Tweet. Would love a retweet while your at it 

https://twitter.com/ChrisDMacro/status/1282712626988900360

Love you all!