Blue Chips Break Out as Traders Pivot Before the Fed

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Blue chips are breaking out as investors pivot from growth stocks to value.

The S&P 500 rose 0.7 percent between Friday, July 14, and Friday, July 21. The Dow Jones Industrial Average was the big mover, jumping to a new 52-week high. Its 2.1 percent gain represented the Blue Chip index’s biggest outperformance versus the broader market since October. The Nasdaq-100 fell 0.9 percent. It was the first time in five weeks that the technology-heavy Nasdaq declined as the S&P 500 and Dow rose.

Strong earnings from financials like Bank of America (BAC) and Morgan Stanley (MS) triggered the move. Big health-care stocks in the Dow like Johnson & Johnson (JNJ) and UnitedHealth (UNH) also rallied after beating estimates. Those stocks had struggled earlier in the year as investors favored artificial-intelligence names like Nvidia (NVDA) and Microsoft (MSFT).

Attention this week focuses on Wednesday’s Federal Reserve meeting and even more quarterly results. (More details below.)

Tesla, Netflix

Biggest Gainers in the S&P 500 Last Week
Zions Bancorp (ZION)+18%
Charles Schwab (SCHW)+14%
KeyCorp (KEY)+13%
Citizens Financial (CFG)+12%
Northern Trust (NTRS)+11%
Source: TradeStation Data

Tesla (TSLA) and Netflix (NFLX) were the two main Nasdaq stocks to report earnings last week. Both rallied into the news and fell after.

TSLA dipped nearly 10 percent on Thursday after operating margins shrank almost 2 percentage points from the first quarter. The lower profitability followed price cuts, echoing an announcement by Ford Motor (F) it would discount its Lightning pickup trucks.

NFLX fell almost 9 percent after weak advertising demand hurt its revenue guidance (despite strong subscriber growth). The news corresponded with poor results from advertising agencies Interpublic (IPG) and Omnicon (OMC). Will the trend impact Alphabet (GOOGL) and Meta Platforms (META), which also rely on advertising? (Both report this week.)

Dow Jones Industrial Average, weekly chart. Notice the breakout last week.

Quarterly Rotation

Last week’s apparent switch from growth stocks to value occurred near the beginning of the second half. (Other big rotations corresponded with similar moments, like the move away from growth in early 2022 and the return to growth in early 2023.) Homebuilders, the strongest non-tech group in the first half, fell as housing data came up short.

Lagging sectors like energy, healthcare, financials and utilities benefited from the rotation. Industrials and transportation stocks continued their outperformance.

Banks were the top-performing industry, rebounding from their drops in March after the failure of Silicon Valley Bank. Zion Bancorp (ZION), which lost two-thirds of its value between mid-February and early May, led the rebound after announcing its deposit base recovered. Profits also edged past Wall Street forecasts.

S&P 500, daily chart, with select patterns and indicators.

Charting the Market

The S&P 500 had potential signs of over-extension as it touched a 15-month high. The stochastic slow oscillator hit 95, above the 80 threshold representing overbought. Wilder’s Relative Strength Index (RSI) moved into overbought territory as well.

The American Association of Individual Investors’ (AAII) sentiment survey also revealed that 51 percent of respondents are “bullish.” The reading, its highest since April 2021, is sometimes considered a contrary indicator because it may reflect more investors have now put their money to work.

Still, the market is giving few bearish signals over longer time frames. Traders looking for a pullback may eye the July 1 peak around 4456. The March 2022 high of 4437 is potentially the next upside level.

The Week Ahead

Biggest Decliners in the S&P 500 Last Week
InterPublic (IPG)-17%
Omnicom (OMC)-13%
Discover Financial Services (DFS)-11%
Equifax (EFX)-10%
Albemarle (ALB)-8.2%
Source: TradeStation Data

This week is packed with major events: a Fed meeting, earnings from more than one-third of the S&P 500 and other economic news.

Today is mostly quiet, but tomorrow brings results from companies including MSFT and GOOGL. Consumer confidence is also due in the morning.

Wednesday’s big event is the Fed’s policy decision at 2 p.m. ET, followed by Chairman Jerome Powell’s press conference 30 minutes later. The central bank is expected to raise interest rates after by 25 basis points (according to CME’s FedWatch tool) after not hiking in June. Other events include results from META, crude-oil inventories and new home sales.

Thursday brings the Commerce Department’s first estimate of gross domestic product, plus initial jobless claims and durable-goods orders. McDonald’s (MCD), Intel (INTC) and F are some of the important quarterly reports.

Friday’s big item is personal income and spending. That includes the personal consumption expenditures (PCE) deflator, an inflation measure often monitored by the Fed. Exxon Mobil (XOM) and Chevron (CVX) also report earnings.

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