The earnings season is about to kick-off. Should we buy now?

By analyzing the overall stock market performance in the past 12 months, we should firstly mention the massive correction that occurred exactly a year ago, starting on the 20th of February, 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 all their positions 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 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. That is something worth mentioning, right?

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. Since February this year, we have been seeing some profit-taking interest among investors and traders that was actually quite widely expected considering the huge rally to the upside in the past 12 months. So, we indicated in our analyses for February and March that we would prefer to wait for a bit of a correction on the major ETFs and stocks we are looking at, which would give us a chance to buy them at a decent discount ahead of the earnings season starting now in April.

The earnings season happens 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. Taking into account their strong financial performance in the past 2-3 quarters, we would be very interested in the upcoming Q1 2021 financial results this month. The largest companies are expected to deliver their earnings after the 14th of April. That’s the reason why we are so excited about analyzing their performance now ahead of the earnings reports because in case they report better than expected results, we would expect to see another strong bullish rally afterwards that would in turn give us a chance to maximize our profitability to the upside.

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 $25 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

By looking at the daily chart of the XLV, we should say it has been in a clear uptrend in the past year since the market correction caused by the coronavirus in February 2020, which ended on the 20th of March. Since then, the XLV had gone up from the $73 lows to the $118 highs in the last week of January 2021 (62% rise). Since then we have seen some profit-taking interest among traders and investors, which was quite expected after the 62% surge to the upside in the past year. So, traders and investors started cashing in some profits and that led to a correction towards the strong support at $109, which then brought lots of buying pressure and the price failed to break that key support mark to the downside.

In fact, if we look back at the daily chart of the XLV, we could easily see that the $109 has been a strong support line and the price has been failing to break that level to the downside since November last year. Logically speaking then, the price bounced immediately after touching that key support mark to reach the current levels at $116-$117. What is the main reason for the strong appreciation of the XLV at the moment? Well, traders and investors are currently positioning themselves ahead of the earnings season starting now in April. In other words, all publicly traded companies would be announcing their quarterly financial performance in order to show the market how they have performed in the first 3 months of 2021. By looking at the 4th quarter 2020 results, we shall say we were quite impressed by the performance of most of the largest companies out there, which prove they could do well even during such tough pandemic times.

Following the overall performance of those companies in the past year, we have no reason to expect they would disappoint this quarter. Therefore, we remain bullish on the stock market in general.

The daily chart shows that after bouncing from the key support at $109 the XLV has managed to break the strong resistance (broken support) at $114 which now plays as a strong support mark that brings lots of buying pressure again. In fact, the price has been failing to break that support for around 3 weeks since the 10th of March and has been signaling for lots of buying pressure at that point. As long as the price stands above these key support levels at $114 and $109 we would remain bullish for the leading ETF and expect to see more rallies to the upside in the near future.

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.

By looking at the chart of the SPY, we could see the massive uptrend that has been going in the past year. The SPY failed to break the strong resistance at $395 in the middle of February and that led to a profit-taking correction that sent the price towards the strong support mark at $370-$375 that motivated traders to start buying at a good discount, which led to another strong bullish rally that followed right afterwards. The price then broke the resistance at $385 to reach the current levels at $399-$400. In other words, the recent price action clearly shows the strong buying interest taking place among market participants around the current levels, meaning traders are preparing themselves for the upcoming earnings season in April.

The price is currently trying to break that major resistance at $400 but we believe in case the leading companies out there report strong financial results then the SPY would spike even higher and we could see it trade around $420-$440 or higher in the near future. Moreover, the technical indicators are pointing higher at the moment, giving further bullish indications.

In case of a short-term profit-taking interest we would expect the price to find lots of buying pressure again at the first support mark at $385, followed by the next key support at $375. Even if the price manages to break these two key support marks it is expected to face lots of buying interest again at the third strong support at $360-$365. Overall, we are expecting the SPY to remain strongly bullish in the near future in case of strong financial results that are likely to come out by the leading companies out there and that would give a further boost to the price in the next few weeks.

Chart: SPY

We would wait for a potential short-term profit-taking correction and start buying the SPY at around the first strong support at $375. In case the price drops further in the short-term we would be interested in buying some more at the next key support at $360-$365, which would give us a chance to get a better average price on our long positions and further maximize our profitability to the upside. Our initial profit-taking target would be set at $390-$395, followed by the next target at $420-$430 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 wait for a short-term pullback on the XLV and start buying at the first support mark at $114. Should the price drop further in the short-term we would be adding more to our buy positions at the next strong support at $109-$110.
Our first take-profit target would be at $120-$125, followed by the next target at $135-$140 where we would be fully cashing in our profits.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we have analyzed the performance of some of the biggest companies within the XLV and SPY that have a big impact on the overall performance of the two ETFs.

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


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