The earnings season is kicking-off soon. Does the stock market look attractive at the current levels?

By analyzing the overall stock market performance in the past 12 months, we should firstly mention the massive correction that occurred last year, starting on the 20th of February 2020, led by a massive sell-off caused by the coronavirus outbreak. In fact, the stock market lost around 35-40% of its value in less than a month. The main reason for the huge correction were the investors’ fears about the immediate economic slowdown that was expected to follow, caused by the virus and therefore investors started selling their positions in order to cash in whatever they could and avoid losing money. At the same time speculators saw that as an amazing short-selling opportunity that would give them a chance to make money to the downside. Well, that’s exactly what happened and the market dropped dramatically in the next month where the largest companies out there, such as Apple, Google, Facebook, Netflix, Amazon and others lost a huge portion of their market capitalization in only 3-4 weeks. Actually, that was a correction we hadn’t seen since the financial crisis of 2008 where the stock market lost around 50% of its value in less than a year.

Since the 2008 crisis the market had been in the longest uptrend in history – almost 11 years of rising prices. Well, that was quite impressive to say the least, but it was logical to see lots of selling pressure once the coronavirus started spreading around the globe last year, leading to a worse correction on the market compared to the one we saw in 2008, due to the fact that back then the market dropped 50% in 1 year while now we saw a correction of 35-40% in only a month.

Yet, as we have seen many times on the market, bad news is good news in many situations. In other words, the huge correction that occurred last year gave us an amazing opportunity to buy our favourite stocks at a massive discount – an opportunity we hadn’t have for almost 11 years before that. Logically speaking, smart money start flooding into the stock market and the market bottomed out immediately, leading to a massive uptrend that occurred in the next 9 months till the end of 2020. Moreover, one of the main reasons for the continuation of the strong bullish rally has been the strong financial results reported by the leading companies out there. By looking at the 4th quarter 2020 financial results, we shall say the leading companies managed to perform quite well even during the pandemic times and reported some very strong figures. That was quite impressive taking into account the global economic slowdown caused by the coronavirus.

Apple for example reported a record number of iPhone sales in the 4th quarter of 2020, while Tesla’s share price went up roughly 1500% in 2020.

We have been very bullish on the stock market after the correction in February-March 2020 and have been giving lots of buying indications to our followers ever since. In other words, we started actively buying stocks when the market bottomed out on the 20th of March last year and have been making high profits to the upside since then, following the overall bullish rally on the stock market in the past year.

The earnings season takes place 4 times in a year (every 3 months) where all publicly traded companies deliver their financial results for the past 3 months in order to show the market how they have performed and that of course is extremely important for the future direction of their share price.

The 4th quarter (Q4) earnings results for 2020 showed that the leading companies out there have performed quite well even during the coronavirus pandemic and that was extremely positive for their share price performance afterwards. Furthermore, the Q1 2021 financial results reported by the leading companies out there also came out better than expected and that further confirmed that the economy has started going back to normal levels step by step. In fact, that is quite logical taking into account that the situation with the coronavirus has kept on improving and the vaccination process keeps increasing and that is expected to get us out of the tough pandemic we have been living in the past 18 months.

As the economy has improved significantly over the past couple of quarters, we are quite excited about the upcoming 2nd quarter earnings results in July. In case the leading companies out there report strong financial results again, we would expect the stock market to keep rising after the event and that would give us a chance to make high profits to the upside, following the strong uptrend that has been going for almost 1.5 years now.

Today’s analysis will focus on the 10-year positive correlation between the Health Care Select Sector SPDR Fund (XLV) and the SPDR S&P 500 ETF Trust (SPY), which stands at 86%. We would also be looking at some of the biggest companies within the two ETFs and evaluate their recent performance, which would give us a chance to come up with some potential investment ideas and be able to maximize our followers’ profitability in the current market environment.

As you know, the Dow Experts have developed a modern-market approach, based on the Dow Theory and created by Charles Dow more than 100 years ago. Yet, while the basic Dow Theory was based purely on the correlation between the Dow Jones Industrial Average and the Dow Jones Transportation Average, our modern-market approach is based on more than 30 correlations, including all the other key sectors on the market, such as Technology, Services, Consumer discretionary and non-discretionary, Financials, Energy and others. Moreover, our modern approach includes the importance of both fundamental and technical analyses because we believe using a combination of both is vital for one’s success and profitability on the market nowadays. The correlation-confirmation model we have developed gives us a chance to identify market reversals, as well as trend continuation patterns, which in turn give us specific buying or selling signals, giving us a chance to benefit from both bullish and bearish markets.

The Health Care Select Sector SPDR Fund (XLV) dominates the US health care segment on almost every measure. The XLV is the oldest and largest fund in the segment with an extensive daily trading volume and liquidity, making it an unparalleled leader in the sector. The leading ETF has got $28 billion in assets under management and an average daily trading volume of $1.1 billion. Moreover, it is relatively cheap amongst its peers, making it a very affordable and at the same time attractive investment. The XLV is concentrated on investing in the biggest stocks within the health care segment, including Johnson & Johnson, Merck, Pfizer, AbbVie and others.

Technical analysis

The daily chart shows that the XLV has been in a massive uptrend since the 23rd of March when it bottomed out from the $72 lows. Since then, the leading ETF has been in a massive uptrend and investors have already managed to push it to the current levels at $125. In other words, the price has almost doubled in the past 16 months and that has helped market participants make high profits on the way up.

Yet, the daily chart also shows that the price is currently testing the key resistance at that $125 mark and has been failing to break that level since early May. Yet, the daily candle on the 25th of June closed above the resistance at $125, giving strong bullish indications we have been looking for. In other words, the $125 has now become a strong support that is expected to motivate investors to start opening their buy positions at.

Furthermore, the daily chart shows the next strong horizontal support at $123, which matches with the diagonal support at that point. Should the price break that first support, it would be heading towards the next major support at $120-$121 where more buying pressure is expected ahead of the earnings season. Since the real earnings season is starting on the 13th of July with some of the leading banks announcing their earnings first, we would be looking to start buying the leading ETF at those key support marks and be able to make high profits to the upside.

In order to further confirm our bullish expectations for the XLV, we have decided to analyze the recent performance of the SPY for a further clarification and an additional reference that would help us make a decision whether to take an action and buy the XLV.

The SPDR S&P 500 ETF (SPY) tracks a market-cap-weighted index of US large and mid-cap stocks and is the best recognized and oldest ETF and typically tops ranking for largest assets under management (AUM). As a matter of fact, the SPY has got $360 billion in assets under management. The SPY is also the ETF with the greatest trading volume with its daily average of $27 billion. Moreover, the SPY is very well diversified thanks to its investments in different sectors on the market. Its biggest holdings are Microsoft Corp., Apple Inc.,, Facebook Inc., Alphabet (Google), Berkshire Hathaway, Inc., JPMorgan Chase Inc. & Visa Inc.

The SPY is actually the largest and most well-known ETF and offers a great exposure to the largest companies in the US, following the largest Index in the US – S&P 500, which gives investors a chance to benefit from the day-to-day fluctuations on the leading 500 companies in the US and benefit from their share price movements.

Technical analysis

By looking at the chart one could see the massive uptrend that has taken place on the SPY in the past 15 months that sent the price towards the $420 highs in the first week of May. The price then struggled to break that resistance immediately and made a bit of a profit-taking correction that sent the price to the support at $404-$405, forming a double bottom at that point and motivating traders and investors to start buying actively at that point, leading to an immediate bullish reaction afterwards. In fact, due to the increased buying interest ahead of the earning season, the price managed to break the strong resistance at $420 to reach the current levels at $426. In other words, the price broke the resistance and gave further buying indications. The broken resistance became the strong support that we would be looking to start opening our first long positions at, which matches with the 50-day moving average at that point and the diagonal support that also stands at that point. Overall, we remain bullish on the SPY and would be looking to start buying at around the first strong support, followed by the next one at $404-$405.

Chart: SPY

We would wait for a short-term pullback on the price that could send the price a bit closer to the support and start buying at around $422-$423, right above the $420 support (broken resistance). Should the price drop further in the short-term, we would be looking to buy more at around $410, above the next key support at $405, which would give us a chance to get a better average price on our long positions. Our initial-profit-taking target would be set at $435-$440, followed by the next target at $465-$475 where we would be fully cashing in our profits.

Overall, the recent price action of the SPY clearly confirms our bullish stance on the XLV and we would like to start buying in order to benefit from the potential bullish rallies during the earnings season.

Chart: XLV

We would start buying the XLV at around the first support at $125. Should the price drop further in the short-term we would be looking to buy again at around $123 and the third strong support at $120-$121, which would give us a chance to get a better average price for our buy positions and further maximize our profitability to the upside. Our initial profit taking-target would be set at $133-$135, followed by the next target at $145-$150 where we would be fully cashing in our profits.

In order to further assist our followers in boosting their investment results, we have analyzed the performance of some of the biggest companies within the XLK and XLC that have a big impact on the overall performance of the two ETFs.

You can find them in our Stock Picks for July rubric.


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