foxex: Nervous Investors Punish GE, Netflix and Viacom

Chart Advisor | Focus on the Price

Thursday, August 15, 2019

1. Nervous Investors Flee Stocks with Even Hints of Bad News

2. Small Cap Stocks Continue to Under-Perform Large Cap Stocks

3. Bond Prices Rise Dramatically

Market Moves

While the broader market traded into a tighter range, some stocks plunged deeper into new monthly lows Thursday as mounting nervousness among investors becomes ever more apparent. The session was marked by tepid movement in response to some good news in consumer sentiment and a solid earnings report from Walmart (WMT). However, Cisco (CSCO) surprised the market after yesterday's close, and not in a good way.

Cisco's earnings report included guidance to weaker performance in the coming quarter. This information precipitated a selloff that closed the session more than eight percent lower from the previous day. It was an unusually strong selloff and underscores the current environment for stock investors. In more optimistic times, investors may respond to such news by taking the opportunity to acquire more shares amidst an apparent overreaction. The current market environment is filled with investors who are not so forgiving as they are becoming more and more sensitive to any bad news at all.

For example, though the S&P 500 is struggling to maintain its highs (see chart below), any company with even a slight hint of bad news has been punished by investors. Netflix' (NFLX) news that it had lost over 100,000 subscribers has cost the company a 20% decrease in share price. General Electric's stock (GE) recently lost a similar amount in just a couple of trading sessions as an independent report was published detailing a claim about how the company may be fudging their books. Viacom (VIAB) and CBS both lost about 15% as they announced details of their merger and a plan to compete with Netflix that investors apparently consider, frankly, a dumb idea. JP Morgan (JPM) detailed weaker than expected performance last month, including a sizable loss from their trading divisions. The stock's deterioration since then puts it in class with other companies making missteps.

If these stocks were the only signs of market nervousness, then a few curiosities like this might not be worth mentioning. However investors are showing an unusual level of nervousness on many fronts, including reduced risk appetite and a flight to safety.

Investors Reducing Risk Exposure to Small Cap Stocks

Both professional fund managers and individuals trying to grow their nest egg savings have a sense of when it is time to add a bit of risk for the sake of growth opportunities. However, recent days have shown that neither group believes now is the time for such a tactic.

The chart below shows that the Russell 2000 small-cap stock index (as tracked by ticker symbol IWM) has continued to lose ground to the S&P 500 throughout 2019, and in accelerated fashion in recent months. Today's session saw the riskier asset group touch new lows in a continuation of its multi-month downward trend. This relative weakness is an additional indication that investors' attitudes may be significantly unfavorable towards taking on more risk. This attitude historically is coincident with downward trends in the broader market for stocks overall.

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Bond Prices Rise Dramatically

In yet another indication of investor concern, bond prices show clear evidence that a flight to safety has been underway since the beginning of August. Today's session pushed 30-year bond prices (as tracked by the ETF with ticker symbol TLT) to new highs. It brought the total rise in 30-year Treasury bond prices to 12% higher so far this month.

With bond yields falling inversely compared to the price action, it is clear investors are moving money into bonds not because of value, but because of the perceived safety and predictability of the asset. Investors fleeing risk for safer assets is a clear indication that market volatility is likely to continue in the near future.

The Bottom Line

Though stocks traded to a nearly unchanged close on Thursday, investors are showing indications of heightened nervousness and a taste for safer investments. Stocks with bad news show dramatic drops, the Russell 2000 small-cap stock index is making new lows, and bond prices are making a sharp and stunning rise. Investors who haven't been paying attention up to this point might do well to consider protecting their portfolios from continued downtrends in stock prices.

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