Stocks Bounced Last Week, But Can They Overcome These Two Risks?

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Stocks bounced again last week, but two potential risks may challenge investors.

The S&P 500 rose 1.6 percent between Friday, October 15, and Friday, October 22. It was the third straight weekly gain following a sharp drop earlier in the month.

The rebound brought stocks back to their previous high at the start of September. It resulted from extreme negativity lifting as investors shifted their attention toward the onset of earnings season. Will the move continue, resulting in a breakout? Investors may focus on two issues.

Biggest Gainers in the S&P 500 Last Week
Pool (POOL)+11%
Anthem (ANTM)+10%
Etsy (ETSY)+9.1%
SVB Financial (SIVB)+9.1%
PNC Financial (PNC)+8.5%

The first item is quarterly results for major technology stocks like Apple (AAPL), Facebook (FB) and Alphabet (GOOGL). Snap (SNAP) cast a pall across the sector with a disappointing revenue number. The miss was especially concerning because it came despite strong usage. That suggests that privacy changes on AAPL’s iOS is hurting business more than expected. It echoed a similar warning by FB on September 22.

SNAP also cited weaker overall demand for digital ads. That could remove one of the major positives supporting Internet stocks this year.

Supply-chain issues are another potential concern with earnings next week. Semiconductor giant Intel (INTC) had its worst drop in over a year on Friday after disruptions caused revenue to miss estimates.

A second major item is the prospect of tighter monetary policy. Chairman Jerome Powell repeated comments in favor of tapering asset purchases late last week. That could increase anxieties into the Fed’s meeting next Wednesday, November 4.

Tesla (TSLA), daily chart, with 50- and 100-day moving averages.

Tesla Takes Off

While supply-chain issues hurt INTC, Tesla (TSLA) beat estimates despite similar challenges. The electric-vehicle company exceeded forecasts on every metric — especially profit margins. Analysts responded by raising price targets, seeing the potential for even stronger results as new factories ramp up and bottlenecks ease. That report planted TSLA at new all-time highs above $900.

Netflix (NFLX) was another big Nasdaq stock that jumped to new highs. The streaming video company added more subscribers (4.38 million) than expected last quarter. It also said content production can resume as coronavirus infections wane. That creates an unexpected positive for the company, with user growth continuing after the pandemic as operations improve.

Biggest Decliners in the S&P 500 Last Week
International Business Machines (IBM)-12%
PayPal (PYPL)-10%
Intel (INTC)-9.2%
Ulta Beauty (ULTA)-8.4%
Baker Hughes (BKR)-8.4%

Overall, last week’s gains were dispersed across the market, with all 11 major sectors advancing. Financials were the only group to close at new all-time highs, supported by strong earnings and low multiples. Investors may want to study financials now that they’ve established new highs above their 2007 peak.

Homebuilders, retailers and Chinese stocks also gained. Airlines and biotechnology fared the worst.

IBM Plunges

International Business Machines (IBM) plunged after revenue missed estimates across its key business units. The company also warned of higher costs and declined to say when things will improve. Aside from the pandemic selloff of March 2020, IBM had its biggest weekly drop since October 2008.

PayPal (PYPL) also fell sharply after Bloomberg reported it may acquire Pinterest (PINS) for $45 billion. Analysts questioned the valuation and expressed worries about PINS’ slowing user growth.

Slowing growth was also a problem for Beyond Meat (BYND), which slashed its revenue guidance after “expected incremental orders … did not materialize.” The plant-based food company dropped to a 1-1/2 year low.

S&P 500, daily chart, with 50- and 100-day moving averages.

Charting the Market

Last week’s bounce brought the S&P 500 back above its previous all-time high on September 2. Prices made a higher high and higher low on Friday, resulting in a so-called outside candle. That potential reversal pattern, occurring at the same level as an early peak, could make some traders expect a pause.

The major indexes also had some potentially interesting differences. For example, the Dow Jones Industrial Average managed to close at a new all-time high. The Dow Jones Transportation Average also had its biggest weekly gain (+3.9%) since early August.

Meanwhile, the Nasdaq-100 lagged the overall market and closed more than a 1 percentage point below its previous peak. That’s consistent with sentiment potentially shifting away from large growth stocks.

Events This Week

This week is packed with earnings. Roughly one-third of the S&P 500 companies announce results, including major Nasdaq stocks like AAPL, Microsoft (MSFT) and Amazon.com (AMZN).

FB gets the ball rolling this afternoon.

Tomorrow features new-home sales and consumer confidence. The big quarterly reports include GOOGL, General Electric (GE), MSFT, Advanced Micro Devices (AMD) and Twitter (TWTR).

Durable-goods orders and crude-oil inventories are on Wednesday. Ford Motor (F), General Motors (GM), Boeing (BA), McDonald’s (MCD) and eBay (EBAY) release earnings. The Ethereum Altair upgrade is also expected to take effect.

Thursday brings the government’s preliminary estimate for third-quarter gross domestic product and initial jobless claims. AAPL, AMZN, Starbucks (SBUX), Caterpillar (CAT), Mastercard (MA) and Shopify (SHOP) issue results.

Personal income wraps things up on Friday. Exxon Mobil (XOM) and Chevron (CVX) also report.

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