The Bulls are Attempting to Rally Behind PepsiCo, but Rising Oil Prices and Yields Could Stop the Charge

Bitcoin, crude oil, yields, and stocks are all pointing to a higher open, but will stock be able to hold on to their gains? Over the last month, the bears have been able to push back against the bulls. Monday’s selloff was led by the Technology sector with Facebook under fire. PepsiCo looks bullish in pre-market trading after a better than expected earnings report.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Rising Oil Prices
5 min read
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Key Takeaways

  • Tech-Heavy Nasdaq Continues to Lead the Sell-Off 
  • Oil Breaks a Significant Technical Level on Fundamental Reasons  

  • Energy and Yields Continue to Influence Investors 

(Tuesday Market Open) Bitcoin (/BTC) topped $50,000 this morning for the first since May, but traders may be more focused on oil prices and yields. Crude oil (/CL) is continuing its rise as futures traded more than 1% higher before the market open. When looking for inflation, gas prices are one of the first places people feel it, so rising oil prices are an important indicator in today’s environment.

Rising oil prices appear to be pulling yields higher as the 10-year Treasury Index (TNX) is testing 1.5% again this morning. Higher yields can often help Financial stocks.

Currently, rising oil prices and interest rates aren’t deterring stocks because the major indices futures are pointing to a higher open as well. But we’ve seen this movie before, the bulls get an early start on the day but are often overwhelmed by the bears later. 

PepsiCo (PEP) is giving the bulls a reason to be positive after announcing better-than-expected profit and revenue and then raised its guidance for the next year. The company has been able to navigate supply chain issues and believes it’ll continue to do so going forward.

If consumers can focus on services instead of products, the supply chains could find some relief. After the open investors will have a chance to see if the service sector is coming back. The ISM Non-Manufacturing report will be released this morning.

The TD Ameritrade Investor Movement Index® (IMXSM) tracks TD Ameritrade client investing behavior. In September, the IMX reflected that clients were net buyers of equities and fixed income assets. Apple (AAPL), Alibaba (BABA), Ford (F), Nvidia (NVDA), and SoFi (SOFI) were among the buying targets. At the same time, clients took advantage of rising prices to sell Tesla (TSLA), Netflix (NFLX), Amazon (AMZN), American Airlines (AAL), Delta (DAL), and Bank of America (BAC).

Technically Speaking

On Monday, investors were tech sellers once again. The tech-heavy Nasdaq ($COMP) was down more than 2% on Monday and has fallen more than 7% from its September 7 high. The Technology sector continued to fall as bond yields rose. Facebook (FB) helped pull the sector lower after falling 4.89%. Facebook and its subsidiary Instagram are currently experiencing outages that are adding to its recent whistleblower allegations.

The company is facing scrutiny after former Facebook employee Frances Haugen “unmasked” herself on 60 Minutes over the weekend. Haugen was behind a series of Wall Street Journal articles about Facebook and Instagram that alleged these platforms promoted misinformation and fueled anger to keep users engaged with their platforms, as well as the role the platforms play in the mental health of young girls.

Facebook investors are trying to determine the amount of harm the news will cause the company. Facebook is no stranger to controversy and continues to be a regular in congressional hearings and investigations. It has also been adept at navigating its scandals. Currently, advertisers and users have remained quiet on whether they’ll continue to use the platforms.

However, the sell-off may not necessarily be about these issues because other social media companies including Pinterest (PINS) and Twitter (TWTR) were also lower at 5.6% and 5.8% respectively.

Same Old Story

Similar themes keep popping back up during these down days. The sell-off in stocks started before the market open on Monday when heavily indebted real estate developer China Evergrande was suspended from trading on the Hang Seng exchange. Trading in China is closed this week for holidays.

Oil prices (/CL) are testing the $79 level after breaking a historic resistance level around $76.50. Traders have used this resistance level to identify areas of buying and selling. From 2014 to 2020, it has been an area of resistance. Prior to 2014, it was an area of support. If this level holds, many technical analysts may project even higher oil prices.

OPEC (Organization of the Petroleum Exporting Countries) and Russia appear to be happy with rising oil prices because they’re large exporters. The Wall Street Journal reported that both parties have chosen to leave production rates the same instead of raising output to meet higher demand. With energy crises in Europe and China, some investors may see fundamental reasons for oil prices to rise. 

Merck (MRK) continued its Friday rally, climbing more than 2% on Monday. The company’s COVID-19 therapeutic was found to be highly effective in avoiding hospitalization and death. Additionally, Johnson & Johnson (JNJ) is seeking FDA approval for a COVID-19 booster shot. However, the news wasn’t a booster for the stock, which traded 0.78% lower. Moderna (MRNA) and Novavax (NVAX) continued to see their shares fall at 4.47% and 1.8% respectively. Sage Therapeutics (SAGE) and Biogen (BIIB) also traded lower despite announcing positive news on the effectiveness of a new depression treatment. 

Volatility

CHART OF THE DAY: VIX HISTORY. The CBOE Market Volatility Index (VIX—candlesticks) is slightly elevated compared to its historical range.  Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Getting a Fix on the VIX: The Cboe Market Volatility Index (VIX) is used by many different traders in various ways. One way is as a fear gauge. Currently, the VIX is a little off its lows. This condition may suggest that fear is increasing. Because the VIX has yet to spike above the 30 level, it also suggests that the recent market sell-off has yet to spark panic selling. An orderly sell-off is often seen as a sign that investors are engaging in normal portfolio management like taking profits and adjusting allocations to meet risk and goal profiles, but only time will tell.

Yield Signs: While rising yields can be frustrating for borrowers and technology and communication stock investors, a change appears to be taking place in the yield curve that is often seen as a healthy sign for the economy. After years of lowering rates and quantitative easing, the yield curve appears to be normalizing.

In a normal yield curve, the rate of return corresponds with the amount of time money is being lent. The longer the maturity, the more an investor expects to make. One way to monitor this relationship is to follow the yield ratios found on the Economic Data subtab of the Analyze tab on the thinkorswim® platform.

EV Sparks Competition: Tesla certainly didn’t start the week flat but made news with its record car deliveries. On Thursday, Tesla holds its annual meeting, which will likely draw a lot of media. General Motors (GM) is hoping to snag a little attention away from Tesla with its investor event on Wednesday. GM has set a goal to be all electric and to have 30 new global electric vehicles by 2025.  

However, GM is playing catch up with Tesla, and the field is getting crowded. Last month, Ford (F) announced the production of a large plant in Tennessee and Kentucky. According to Kelly Blue Book, 33 companies are already selling electric vehicles (EV) with various makes and models. EV investors may wish to tune in to see how GM plans to be a major player in the space.

Good Trading, 

JJ

@TDAJJKinahan

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Key Takeaways

  • Tech-Heavy Nasdaq Continues to Lead the Sell-Off 
  • Oil Breaks a Significant Technical Level on Fundamental Reasons  

  • Energy and Yields Continue to Influence Investors 

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