Buyers Are Leaving the Market – and It’s Flashing This Warning Sign

The big story of last week wasn’t a story at all. It was the lack thereof – the eerie quiet in the market.

We saw the S&P 500 drop to its lowest weekly volume figures since October. But back then, we had a reason: everybody was waiting for the presidential results before investing in stocks again.

This time around, the low buying isn’t as easily to nail down. We were charting into new all-time highs, but volume was abysmally low.

In fact, last Friday’s volume was the lowest since Christmas Eve 2020.

This is a big, flashing sign that buyers are pumping the brakes ahead of earnings season, which starts this week with companies like JP Morgan (JPM), Fastenal (FAST), Goldman Sachs (GS), Delta Airlines (DAL), and Taiwan Semiconductor (TSM).

It’s a busy week of earnings that’s got great potential to deliver a catalyst for the next 5-10% rally in the S&P 500.

Historically, we’d see a lot – and I mean a lot – of “buying-the-rumor” around this time of year, the financial sector alone would usually rally around 8%.

But this year, traders haven’t been so eager.

Nobody is buying anything.

But that doesn’t mean you shouldn’t. From a sentiment perspective, this lack of “buy-the-rumor” activity is actually a good thing for two reasons…

Or two stocks, to be more specific.

These names stand to benefit the most from this low volume…

Here’s why this lack of buying activity is a good thing.

First, we’re not setting up for a lot of “sell-the-rumor” trades that usually follow the earnings announcements, good or bad.

Second, and more importantly to me, it indicates that there’s a “wall of worry” in place for the market as we enter the earnings period.

But remember, “the market always climbs the wall of worry.”

The exception to the rule right now is the activity in the CBOE Volatility Index ($VIX).

The market’s “fear gauge” spent last week diving to its lowest levels in more than a year as the S&P 500 popped to new highs.

This bodes well for the earnings season as the $VIX is now open to unwind to my targeted range of $13-$15. That’s only going to happen if the earnings season takes prices even higher. The catch here is that it will set the market up perfectly for a “sell in May” situation that will likely correct the market by 5-10% at minimum.

I’ll stay on top of this aspect of the market like a hawk as the earnings season progresses.

For now, let’s talk about two stocks that look like they’re ready to take off after their earnings.

CJ’s Earnings Takeoff Stock #1:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

As the third-largest manufacturer of semiconductor chips, it’s a surprise that we’re not hearing more from TSM on the chip shortage as supply shortages are now causing daily headlines. Companies like Intel and TSM are ratcheting up manufacturing to meet demand, which will improve the outlook for TSM.

Last week the stock dropped after the company announced better-than-expected March sales which rose 167% over last year’s rally. This is a lighter than the 17% year-over-year revenue that the company was in the first quarter and the 21.6% revenue growth in the quarter before that.

Traders likely looked at the lighter number and concluded that TSM will have to provide some conservative guidance as part of their earnings report on Tuesday. That would go against the trend that we’ve seen over the last four months as the company has been providing consistent upside guidance.

With demand likely to grow as the economy expands, TSM‘s outlook should remain strong as the company is also likely to provide another upside surprise announcement.

Shares of TSM have struggled to post a turnaround at $115, but the 20-day moving average (the trader’s trendline) is now accelerating higher – which signals building momentum.

While the overhead 50-day moving average is likely to give the stock some pause, the 11% rally between current prices and that trendline is more than enough to grab some quick profits.

CJ’s Earnings Takeoff Stock #2:

Wells Fargo & Company (WFC)

WFC has spent years coming out from under the dark cloud that the company created, but it looks like the sun is finally starting to shine.

Last quarter, we saw the large commercial bank post its first earnings beat in more than a year as they bested analyst recommendations by a penny. That same report showed the third consecutive increase in quarterly revenue as WFC was clearly getting to focus back on their business.

This is one of the least liked stocks according to the analyst recommendations as the majority of recommendations sit at “hold.” While it makes sense, given the recent history of the stock, it increases the likelihood that the market will see analyst upgrades on WFC on any sign of strength from its upcoming earnings report.

From a technical and performance perspective, WFC shares are leading the financial pack.

Shares of WFC are registering year-to-date gains of 34% compared to the Financial Select Sector SPDR Fund (XLF) respectable gains of 19%. To put those into context, the S&P 500 is currently sitting at 10% gains for the year.

WFC stock is garnering support from its 20- and 50-day moving averages, each of which are in firm bullish uptrends.

Upside potential remains high relative to other financials as the stock is still trading well below its 2020 highs. Many of the financials like JPM and GS are trading at all-time highs and multiples that put them at extremely overbought levels.

Watch for this company to be the leader out of the earnings reports with a target price of $46.00.

I’ll be watching these stocks closely, and I’ll also be keeping my eye out for any other exceptional profit setups we can make.

So, stay tuned for my next Straight-Up Profits article.

Until next time,

Chris Johnson

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