Stocks made a mild break higher right at the start of Thursday's session and managed to hold onto gains until the close as all broad market indexes closed higher for the day. Astute traders might have been able to anticipate such an outcome if they were following Wednesday's after-hours activity in the S&P 500 futures trading. The index futures sold off rapidly after a few tweets went out that, based on anonymous sources, said that the preliminary trade talks weren't going well.
The chart below shows the action in 15-minute increments. It is notable that, while most traders were out of the market, the rumor touched off a rapid reaction in the form of a 2% sell-off within the space of only a few minutes. It took about three hours for traders to get over their worries, but they did, and the index resumed a level only slightly lower than the previous day's close. This action signaled a resilient response to bad news, which itself belies an attitude that buying is the preferred action right now. Compared to the way stocks have performed over the past three weeks, this was an uncharacteristic response. It may also be an indicator of traders' and investors' attitudes as earnings season approaches.
Financial Sector Ready to Face Earnings Season
If you measure from the beginning of the most recent earnings season until now, the financial sector, as tracked by State Street's Financial Select Sector SPDR Fund (XLF), has gone nowhere. With the financial sector fund nearly unchanged over the previous quarter, traders likely enter earning season next week with little to no hope for the sector to surprise anyone. Yet not coincidentally, that might be the perfect time to expect surprises.
A comparison of how the large bank stocks have performed over the past quarter may be instructive as a guide for what to expect in the week to come. If momentum principles apply, Wells Fargo & Company (WFC) and JPMorgan Chase & Co. (JPM) would likely emerge on top after a couple of weeks pass. However, Morgan Stanley (MS), which appears to be discounted compared to the others, may provide the biggest surprise if the bank does well. Middle-of-the-pack players The Goldman Sachs Group, Inc. (GS), Bank of America Corporation (BAC), and Citigroup Inc. (C) will have to have special results to distinguish themselves.
Oil and Gas ETFs Show Price Divergence
The price of oil has experienced serious fluctuation in recent weeks over the attack on Saudi Arabian facilities. Prices as tracked by the iPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL) are currently hovering near their six-month support level. This price trend is usually shadowed by gasoline prices. However, the US Commodity Funds' ETF that tracks gasoline prices, United States Gasoline Fund (UGA), is showing an unusual divergence. This may be an artifact of the current uncertainty regarding oil prices, but even so, in such situations, the phrase "something's gotta give" comes to mind.
The Bottom Line
Despite roller-coaster selling and buying after hours in the futures markets, the S&P 500 index shrugged off bearish rumors to trade higher at the open and hold on to gains throughout the day. Earnings season kicks off next week with the big banks reporting, and Wells Fargo and JPMorgan appear to be best positioned based solely on chart performance since last earnings season. Oil and gas ETFs are surprisingly showing divergence right now, with no obvious explanation why.
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