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SECTOR WATCH: Next Week’s Watch List


By Frederic Ruffy, Optionetics.com
7/20/2005 4:34 PM EST


Earnings reports will drive trading again next week as investors react to upside surprises and downside disappointments. Approximately 700 companies will release results during those five days. A flood of reports is due from energy, basic material, and technology stocks. While energy companies are expected to be post strong results thanks to soaring energy prices, the basic material and technology stocks might offer more upside surprises.

Energy stocks have been an important area of market strength during the past two years. Next week, investors will be looking for evidence that the trend can continue as approximately fifty different energy companies release earnings reports. This week, crude oil slipped from more than $58.00 to $56.72 a barrel. However, during the second quarter, crude oil rose to all-time highs of more than $61.00 a barrel. High prices will probably help boost profits of all types of oil companies.

Several oil drillers including Ensco (ESV), BJ Services (BJS), Valero (VLO), and Tidewater (TDW) report on Tuesday. ConocoPhillipps (COP), Diamond Offshore (DO), Kerr McGee (KMG), and Amerada Hess (AHC) report Wednesday. Exxon Mobile (XOM) is now the largest company by market value and reports profits on Thursday before the opening bell. Investors will be listening to, not just last quarter’s earnings reports, but also the outlook for the second half of the year.

However, even if oil companies deliver healthy profits, the sector might find it difficult to move higher if crude oil prices decline during the next few days. In addition, the Select Sector Energy Fund (XLE), which holds the energy related companies from the S&P 500 Index, ripped higher during the past twelve months. The fund is up nearly 45% from year ago levels and now sits within striking distance of its all-time highs of $47.00 a share. Therefore, some of the good news is probably already reflected in the share prices of these companies, which might lead to a “buy the rumor, sell the news” type of profit taking once the actual earnings report hit the newswires.

However, other sectors such as technology or basic materials can make up the slack if energy stocks don’t find eager buyers. In other words, the rotation out of energy might benefit other areas of the market that are showing visible signs of improvement. On Wednesday, for example, the PHLX Semiconductor Index ($SOX) rose to its best levels in more than a year. Despite a lackluster earnings report from Intel (INTC), investors bid up shares of other chip stocks like Teradyne (TER), Novellus (NVLS), and KLA Tencor (KLAC). The gains were fueled by solid earnings reports from Teradyne and Novellus.

Next Monday, investors will look to Texas Instruments (TXN) for signs that chip stocks can keep running. TI reports earnings on Monday after the close of trading. Amazon.com (AMZN), Siebel (SEBL), and Electronic Arts (ERTS) releases earnings on Tuesday. LSI Logic (LSI), McKesson (MCK), and Computer Associates (CA) report on Wednesday. Earnings from KLA Tencor, Western Digital (WDC), and Symantec (SYMC) are due out Thursday.

Basic materials companies will also be worth watching next week. The group has performed well lately and the Select Sector Basic Materials Fund (XLB) rose 44 cents to $28.73 on Wednesday. The XLB is up 6% on the month. Investors have been buying shares based on the idea that an economic recovery in the second half of the year will help drive better profitability at metal, paper, and chemical companies.

Several important basic material companies are due to report next week and investors will be looking for signs that profits among the basic materials companies are indeed improving. Dupont (DD), International Paper (IP) and US Steel (X) will kick things off on Tuesday. International Flavors (IFF), Louisiana Pacific (LPX), and the largest gold mining company, Newmont Mining (NEM), are due to report on Wednesday. Bowater (BOW), Placer Dome (PDG), and Barrick Gold (ABX) release results on Thursday.

So, next week is a busy week for earnings, especially for energy, technology, and basic materials stocks. Energy companies are expected to post solid results. But, that is already known. However, technology stocks are gaining momentum with leadership from semiconductors and that is a bullish sign. In addition, basic materials are also rebounding ahead of key earnings due out next week. Therefore, look for strengths in these groups and a few earnings surprises to the upside.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site