foxex: Lift Off

Chart Advisor | Focus on the Price

Thursday, January 16, 2020

1. Indexes launch to new highs in dramatic fashion

2. Sector allocations show mixed strategies

3. Is Nextera a utility company or a growth stock?

Market Moves

The S&P 500 index (SPX) closed nearly one percent higher on the day after opening higher and closing nearly at its high for the day. As impressive as the move was, among all major indexes the S&P 500 was the least impressive. The Dow Jones Industrial Average (DJX) and the Nasdaq 100 (NDX) performed similarly, while the Russell 2000 (RUT) and the Russell Microcap index (RUMIC) left the rest behind with the latter closing more than 1.5% higher.

Stocks have shown strong performances to this magnitude many times in the past, but what set today's action apart is that the market had already shown significant strength to start the year and was near its highs already. In fact out of the 11 trading sessions so far in 2020, eight of them have featured a new high price at some point before the close. The two percent rise so far has been largely an uninhibited upward move. Chart watchers will also recognize that when the technology sector and microcap stocks lead all others, investors are tipping their hand showing that they are willing to leave caution to the wind.

Even the Volatility Index (VIX) touched a relatively new low price today. However, the VIX actually closed higher than it opened on the day, demonstrating option sellers' skepticism about strong upward moves in the current market environment.

Sector Allocations Show Mixed Strategies

Over the past six months almost all stocks have trended higher. The chart below displays that the three leading sectors with above average performance during that time are not necessarily the typical growth sectors. These three sectors are tracked by State Street's sector index ETFs for technology (XLK), healthcare (XLV), and utilities (XLU), compared to the S&P 500 ETF (SPY).

Utility sectors are typically considered a safe haven against a downward trending market. These stocks pay dividends and don't usually feature as much price fluctuation. Healthcare stocks are similarly considered safer investments, in general terms, but because the sector also includes pharmaceutical companies, typically seen as more risky, this group of stocks also has more risk associated with it.

This mix of sectors shows the ambivalent nature of investors in the market right now. It appears that while they are aggressively seeking opportunity, they are simultaneously worried about a downward trend and want to keep some of their money in safe investments.

Read more:

Alphabet Shares See Monster Buying

Key Levels for Apple Stock in the First Half of 2020

Transportation Stocks Overdue for a Major Downturn

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Is Nextera a Utility Company or a Growth Stock?

Some utility-sector companies have begun to be comparatively overvalued by conventional standards. Consider Nextera Energy (NEE) as an example. The company is the largest producer of wind and solar power among all utility companies, and sees lots of opportunity ahead. Consequently, the stock has risen strongly over the past few months.

Considering that NEE shares make up 13.5% of the weighting of shares in the Utility Sector ETF, its influence on that sector is extremely strong. Because the company is both a utility company, and because it works with emerging technologies, it is getting interest from both safety-oriented investors as well as those who want growth. So even though it is trading at a P/E Multiple of 37 (twelve points higher than the average of all S&P 500 stocks), it is still considered a safer bet for investors with its two-percent annual dividend payments.

The Bottom Line

Stocks closed dramatically higher today even as Volatility Index prices moved in opposite fashion throughout the day. The microcap index outpaced all others, but utility stocks aren't getting left behind. This mix of safety and opportunity investing underscores the ambivalence of investors in today's markets.