The Market Is Changing Channels

WHAT ARE YOUR THOUGHTS? Communication services have been among the most important leadership groups in this bull market, but the tape is starting to send a very different message.

The absolute chart is still holding support for now, but relative strength has already broken down to a new three-year low.

At the same time, some of the biggest names in the sector, including Netflix and Meta, posted some of the ugliest reaction scores of the quarter.

So here’s our question for you…

Are communication services flashing a real warning sign for the broader market?

Or is this just a healthy rotation away from crowded megacap winners and into new areas of leadership?

Write us at [email protected]. We value your input and may feature your responses in a future post.

We hope you had a great Fourth of July.

The earnings calendar may be running out of fireworks, but the market still gave us plenty to work with last week.

And that's the whole point of the Beat Report.

The headlines slow down, but the tape never stops talking.

Every earnings reaction gives us another clue about where buyers are showing up, where sellers are still in control, and which stocks deserve a closer look as capital continues to rotate beneath the surface.

This week, we’ll start by reviewing the best stories from last week’s tape.

Then we’ll shift into Beat Quarterly mode and look at one of the most important sectors in the market right now: communication services.

On the surface, the sector is still holding support.

But underneath the surface, the relative trend is breaking down, and the earnings reaction data is not exactly inspiring confidence.

So let’s get into it.

What happened last week 👇

• Monday:
  • After being recently spun out from FedEx $FDX, FedEx Freight $FDXF reported earnings for the first time. 
  • The reaction was pretty muted, but the stock is carving out a sweet basing pattern.
• Tuesday:
  • There were no new S&P 500 earnings reactions to cover, so we highlighted Warby Parker $WRBY. The company now has 337 stores, serves 2.7 million active customers, and still represents only 1.3% of the roughly $70 billion U.S. eyewear market.
  • With the earnings sentiment and fundamentals firmly in a primary uptrend, we believe WRBY is poised to resolve its massive bearish-to-bullish reversal pattern soon.
• Wednesday:
  • Again, there were no S&P 500 earnings reactions to cover, so we wrote about the $27 billion diagnostics and research stock, Illumina $ILMN.  
  • ILMN is breaking out to new multi-year highs, and the technicals are supported by very strong fundamentals and earnings sentiment. 
• Thursday:
  • Following a big double beat, General Mills $GIS rallied 8.5% for its best earnings reaction of the 21st century. What's more, the stock is scooping-n-scoring. 
  • After being one of the hottest messes in the S&P 500 over the past few years, things seem to be turning around for Nike $NKE. After beating the market's headline expectations, the stock rallied nearly 5% and snapped a 2-quarter beatdown streak. 
• Friday:
  • There were no new S&P 500 earnings reactions to cover, so we wrote about the $3.5B company that provides background screening for two-thirds of the Fortune 100. Its name is First Advantage $FA. 
  • FA is flirting with the resolution of a massive base, and the technicals are backed by some of the strongest fundamental growth and positive earnings sentiment in the market. 

What's happening next week 👇

The earnings calendar is still quiet, which means our attention is shifting from what is about to report to what this earnings season has already told us.

That is exactly what we do in Beat Quarterly.

We analyze every earnings reaction, organize it by sector, compare the results, and look for the message hidden beneath the surface.

Last week, we looked at the healthcare sector, which is emerging as a market leader. 

This week, we're looking at the communications sector. 

And the message is not particularly bullish...

On an absolute basis, the Communication Sector $XLC is still holding in there.

Price is sitting near a key level of interest that used to be resistance and has since turned into support after last year’s breakout.

And so long as buyers defend that level, the absolute chart is still in fine condition. 

But if XLC breaks below this shelf, it would complete a prolonged distribution pattern and likely mark the beginning of a new primary downtrend for the sector.

That would be a major change in character.

The bigger problem is the relative trend.

XLC is already breaking down relative to the S&P 500 and has recently hit its lowest relative level in three years.

In plain English, the sector is no longer leading.

Instead, it's a major laggard.

And when one of the most important growth-heavy sectors in the market starts underperforming this aggressively, we want to know whether the earnings data confirms that weakness.

Spoiler alert…

It does.

At the headline level, the quarter was not a complete disaster.

Roughly 66.7% of S&P 500 communication stocks beat both revenue and earnings expectations, while 23.8% reported mixed results and 9.5% missed across the board.

That means most companies still beat expectations.

But leadership sectors usually do better than “fine.”

Especially in raging bull markets...

They produce strong headline numbers, strong reactions, and strong follow-through.

That isn't what we're seeing here.

The reaction score data is where the story gets much more concerning.

Netflix $NFLX posted the worst reaction score in the group, at -7.4.

Meta $META was right behind it at -6.2.

Charter $CHTR, Take-Two $TTWO, Electronic Arts $EA, and Pinterest $PINS also posted ugly scores.

That matters because some of the largest and most important stocks in the sector are showing real problems with earnings sentiment.

Google $GOOG was the major exception, posting a strong positive reaction score of 4.1, which matters because Alphabet is the largest weight in the sector.

Comcast $CMCSA actually had the best reaction score in the group at 5.6, while T-Mobile $TMUS, Fox $FOXA, Disney $DIS, and Live Nation $LYV also showed positive earnings sentiment.

So there are still good pockets inside communication services.

But the sector as a whole doesn't look healthy enough for us to treat it like leadership.

And the earnings tape tells us that several of the group's biggest names are being punished hard.

That doesn't mean every communication stock is a short, and it definitely doesn't mean we ignore the positive reactions in names like Google, Comcast, T-Mobile, and Disney.

But it does mean we need to be selective.

The best trades come from finding the individual stocks where the technicals, fundamentals, and earnings sentiment are still aligned.

And that brings us to our next Beat Report Pitch Meeting.

Earlier this month, we held our first-ever public Beat Report Pitch Meeting. 

These are the meetings we usually hold internally, where our Beat Team brings their highest-conviction trade ideas to Steve Strazza and debates them in real time.

For the first time, we pulled back the curtain and let members watch the process LIVE earlier this month.

And because of the overwhelming amount of positive feedback we've received, we're doing it again on Monday.

If you want access to the next pitch meeting, our current watchlist, and the next trade alert we send to members, join Beat Report today.

We hope to see you there!

Cheers,

-The Beat Team

Editor's Note: Four times a year, every company in the S&P 500 tells you exactly how its business is doing. 

Steve Strazza's Beat Report turns that earnings data into stock and options trades built to run, and for Independence Day, you can lock in up to 63% off retail, plus a free quarter of the Jeff Macke Portfolio when you go annual. 

The countdown is already running. → See your Independence Day pricing.