Just what the doctor ordered

As traders are fond of saying, correlation doesn’t imply causation, but nonetheless it must be noted that:

●As of yesterday, the financial stocks led the S&P 500 (SPX) sector rankings over the most recent five days, outperforming the index roughly +2.1% to +0.4%.

●The early part of this earnings season has been (as it usually is) heavily weighted with financial stocks.

A favorable market reaction to strong quarterly numbers from financial companies? Not out of the question, since many of the marquee names reporting in recent days, including Goldman Sachs (GS), JPMorgan Chase (JPM), Citigroup (C), Morgan Stanley (MS), and PNC Bank (PNC), beat their headline earnings and/or revenue numbers.

A peek at the earnings calendar shows general health care stocks are heavily represented in the next several days, with companies such as Eli Lilly (LLY), Amgen (AMGN), Biogen (BIIB), Quest Diagnostics (DGX), Bristol-Myers (BMY), AbbVie (ABBV), Gilead Sciences (GILD), and Baxter (BAX) set to release earnings.

Health care has held its own this year with a 5%-plus return—the third-strongest S&P 500 sector (three notches above the financial sector, by the way). Will health care stocks get an earnings-season boost similar to the one enjoyed by financials?

Baxter (BAX), 10/24/16 – 7/19/18. Baxter (BAX) weekly price chart. Breakout. Hanging around its highs

Source: OptionsHouse

Perhaps, but it’s always a good idea to look at individual stocks. Medical tech giant Baxter (BAX), for example, had a great 2017, rallying more than 50% and popping to a record high around $72.50 in January of this year before correcting in February (weekly chart, above).

But the daily chart below shows that by early June the stock had firmly broken out to new highs, pushing above $75 before settling into its current consolidation, which includes a tighter trading range over the past several days within the larger range.

Baxter (BAX), 4/2/18 – 7/19/18. Baxter (BAX) daily price chart. Nesting ranges

Source: OptionsHouse

The current long-term uptrend has accompanied Baxter’s ongoing push to expand its international footprint, and the company recently raised its guidance for 2018.1 If BAX tops its headline numbers next Thursday, it will be the 15th consecutive time it’s beat earnings and met or beat revenue estimates (over the past 31 quarters, BAX has beat earnings 26 times and revenues 25 times).2

One important question is whether an upside breakout out of the current range(s)—if it happens—is more likely to occur before or after earnings. Although every situation is unique, analysis of the past 31 earnings dates show BAX has tended, on average, to get more of a boost in the days leading up to earnings (and on earnings day itself), and then trade more weakly in the first few days afterward.3

Regardless, it should be an eventful week or so in the health care space.

Econ Watch: One of this week’s more eagerly anticipated economic releases, Leading Indicators, may give bulls some encouragement about future US economic tailwinds: It came in stronger than expected yesterday at 0.5% (although the previous reading was revised lower). The only blemish was a weak building permits number, part of the recently wobbly housing sector.4


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1 StreetInsider.com. Baxter (BAX) Earnings. 7/19/18.

2 Zacks Equity Research. Here's Why You Should Invest in Baxter (BAX) Stock Right Now. 7/5/18.

3 Supporting document available upon request.

4 Econoday. Leading Indicators. 7/19/18.