foxex: Long Term

Chart Advisor | Focus on the Price

Thursday, November 21, 2019

1. Investors show no panic during second day of selling

2. Consumers balancing needs and wants

3. Broker merger might be good for consumers

Market Moves

The major stock market indexes fell only slightly as investors continued their second day of significant selling. The tepid attempt at profit taking may imply that investors will soon be eager to resume their bullish strategies. For further evidence of this we need only compare a collection of stock index ETFs with bond index ETFs.

The chart below shows a stock portfolio made up of equal parts from each of the three large-cap indexes: S&P 500 (SPX), Nasdaq 100 (NDX), and Dow Jones Industrial Average (DJX); compared with a portfolio of four popular bond ETFs from iShares, including the 20-year Bond fund (TLT), the 7-10 year Treasury Bond fund (IEF), the High Yield Corporate Bond fund (HYG), and the Municipal Bond fund (MUB). This important comparison shows a deep undercurrent in this simple price movement. The price change implies that billions of dollars have moved from bonds to stocks in just the past two months and more will continue to do so.

This is good news for stock investors, because bond market investors are usually oriented around longer investing time frames. This movement from one asset class to another suggests that the many investors making this move right now are interested in a long-term investing time frame. Consequently it portends a bullish forecast for stocks in the next several months.

Consumers balancing needs and wants

With Black Friday approaching, analysts are turning an eye to the retail sector to try to gauge where opportunity may best be found ahead of the holiday shopping season. The effort necessary to determine where such investing opportunity can be uncovered may be as simple as comparing the two major segments of the retail market: those that cater to consumers needs versus their wants.

Something that any shrewd chart watcher can do is to compare these two segments in a unique way by looking at just six stocks: Amazon (AMZN) and Home Depot (HD) for the wants, and Coca-Cola (KO), Pepsico (PEP), Walmart (WMT), and Procter & Gamble (PG) for the needs. These six stocks represent the most heavily held components in the sector ETFs that track consumer discretionary and consumer staples sectors respectively.

The chart below demonstrates this comparison for 2019. AMZN and HD have pulled back and all six stocks have flattened their trend. Unless this is the beginning of a longer-term bearish sentiment in the market, then a pattern like this is usually a good indication that the discretionary stocks, the wants, are becoming undervalued and may soon rise higher as better news unfolds. Historically the wants tend to lead the needs, but since the markets are rather complacent right now, a bearish break lower is unlikely.

Bullish Traders Are Shifting Their Focus to Retail

Schwab Rumored to Buy Rival TDA in $26 Billion Deal

Broker merger might be good for consumers

If retail trading customers might like the idea of two popular brokerages merging platforms and services, investors appear to be in love with the idea. The chart below provides the proof. As news broke that Charles Schwab (SCHW) was rumored to have made a bid to buy TD Ameritrade (AMTD), shares of the former closed over seven percent higher, while shares of the latter closed nearly seventeen percent higher. Investors and analysts alike might be tempted to dismiss this outcome as the result of merely plugging the buyout bid into a valuation model for the two companies, but there is likely more to it than that.

Considering the hurdles for Schwab, such as the overall cost of the transaction and the challenges to merge the companies without reducing the value of customers' experiences. Consider further that the company would need to do this in an environment without the revenue from trading commissions (a $100 million dollar annual loss just for Schwab by their own admission). The fact that the price of SCHW shares did not trade lower at the open is a big vote of confidence from investors.

More importantly this price action implies that analysts and investors alike consider a positive outcome for the endeavor to be more likely than otherwise. If you think about this response in that light, then by itself, the price jump is a bullish forecast of the stock market and the overall U.S. economy.

The Bottom Line

Despite closing lower today, the Nasdaq 100 and the S&P 500 maintained tight trading ranges, indicating that sellers are not feeling a sense of panic. Retail consumers may soon drive sales revenues higher, potentially benefiting investors in discretionary stocks more than those holding consumer staples stocks. The market's reaction to the rumored merger between Charles Schwab and TD Ameritrade may actually imply a bullish expectation for the stock market.