Earnings Bonanza

Market Moves 

Three key factors drove U.S. equity markets to pop just short of new record highs on Tuesday — more positive earnings results, anticipation of lower interest rates from the Fed next Wednesday, and U.S.-China trade talks expected to resume on Monday.

As earnings season continues to unfold, investors have been presented with mostly better-than-expected results, even though many of the earnings beats have been measured against lowered expectations. On Tuesday morning, shares of The Coca-Cola Company (KO) gapped up and rose over 6% to a new all-time high just short of the $55.00 level on the strength of its earnings release. Aside from beating both profit and revenue expectations, the company also raised its full-year revenue outlook, now expecting organic revenue growth of 5%, up from 4%.

Here's a chart of Coca-Cola stock showing Tuesday's large surge that caps off a remarkable run since early March:

Chart showing the share price performance of The Coca-Cola Company (KO)

Later in the day on Tuesday, reports surfaced that U.S.-China trade talks would resume on Monday in China, sparking a further rally for stocks.

Semiconductors Surge to Approach Record Highs

We've talked about semiconductor stocks at length recently only because chipmakers as a group have been doing remarkably well of late. And this is despite the major headwinds of a slowing global economy and an ongoing U.S.-China trade war.

Tuesday's reports of a resumption in U.S.-China talks next week gave an extended boost to shares of semiconductor companies. We're also waiting on earnings releases from major chipmakers, which should further define the industry's performance going forward.

As shown on the chart of the VanEck Vectors Semiconductor ETF (SMH), an ETF holding some of the largest companies in the industry, price has just risen above $120.00 and is now approaching April's all-time high at $120.71. Although technical indicators are flashing overbought signals and the $120.00 price region is a strong resistance level, the ETF could see significantly more upside if earnings are generally better than expected and price is able to break to new record highs.

Chart showing the share price performance of the VanEck Vectors Semiconductor ETF (SMH)

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Put/Call Ratio Hints at Investor Caution

The put/call ratio is a simple formula comparing the trading volume of put options to call options. Generally, put options are considered an expression of bearishness for options buyers. Conversely, call options are considered an expression of bullishness for options buyers.

Of course, this is not always the case, as options can be traded for other purposes than just speculating on market direction. Options can also be used to generate income, provide insurance, or to hedge underlying positions. But the most basic function of calls and puts is to express sentiment.

To derive a put/call ratio, simply divide the number of traded puts by the number of traded calls. If there are more traded puts than calls (bearish), the ratio will be above 1. And if there are more traded calls than puts (bullish), the ratio will be below 1. The Chicago Board Options Exchange's (CBOE) put/call ratio provides an overall view of market sentiment for U.S. stocks, ETFs, and indexes.

While this indicator lags the market and may not be a wholly accurate or complete gauge of sentiment, it can certainly provide an insightful look into the overall mood and level of fear in the markets at any given time.

As shown on the chart, the big spike far above 1 in late December corresponded with the disastrous drop in the markets back then. Currently, the put/call ratio has dropped well below 1, providing some indication that investors have become increasingly cautious about the surging market.

Chart showing the performance of the put/call ratio (CBOE)

The Bottom Line

U.S. stock indexes are once again just off record highs and potentially poised to break out to new highs if momentum can keep up. Earnings have been mostly better than expected so far and are likely to continue trending positively overall.

Besides earnings, the biggest risk factors on the horizon occur next week with the Fed's interest rate decision on Wednesday and U.S.-China trade talks. Investors appear to be getting more cautious now, but that won't stop a breakout to new all-time highs if bullish sentiment continues amid all of the key events within the next couple of weeks.

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