Stocks rallied back on Tuesday after the earnings season got started with Johnson & Johnson, JPMorgan Chase, and Wells Fargo reporting Tuesday morning. JNJ gave a pretty bleak forecast, but boosted its dividend and then moved higher on the day. JPM and Wells both moved lower on the day after forecasting very large loan loss provisions.
All four indices moved higher on the day with the Nasdaq gaining 3.95% to lead the way. The S&P moved up 3.06%, the Dow tacked on 2.39%, and the Russell gained 2.09%.
Nine of the 10 main sectors moved higher on Tuesday with the lone sector in the red being the energy sector which lost 0.47%.The financial sector only gained 0.36% and that was the second worst performance.
There were two sectors that gained over 4.0% — consumer staples gained 4.23% and technology gained 4.19%.
My scans continued to shift and the difference between the two lists remained highly skewed to the bearish side.
Last night’s results showed 170 bearish signals and only one bullish signal.
The barometer dropped to -135.4 from 93.4 and that is the lowest reading since January 2019 when the market was recovering from the huge drop in the fourth quarter of 2018.
Today’s trade idea is yet another bearish one and this time it is on an ETF rather than an individual company. The Real Estate Select Sector SPDR (NYSE: XLRE) was one of 27 stocks and ETFs associated with the real estate industry. And the majority of the individual stocks had SMR ratings of a C or worse.
What we see on the chart is that the ETF fell dramatically from above $41 level in mid-February to a low of $24.88 at the March low. I don’t expect such a huge percentage loss this time around, but I do expect a drop. The fund is hitting resistance at its 50-day moving average and it is tremendously overbought based on the stochastic indicators.
Buy to open the May 37.50-strike puts on XLRE at $5.30 or better. These options expire on May 15. With the option premiums and volatility high, I suggest a target gain of 75%. For these options to reach our target, the fund will need to drop to $28.25. The stock fell below the $25 level in March. I suggest a stop at $36.75.
— Rick Pendergraft