foxex: Nervous Tick

Chart Advisor | Focus on the Price

Tuesday, January 21, 2020

1. Stocks tick upward intraday amid investor worries

2. Utility sector shows early flight to safety

3. Netflix earnings rate as an anticlimactic performance

Market Moves

Contrary to what authors like to write about stock market history, most investors actually do think that what goes up must come down. So it wasn't really a surprise to see the broad market indexes opening lower by about one-half percent today. After the three-day weekend punctuated the first two weeks of very bullish trading in 2020, investors appear to have returned to the markets showing plenty of anxiety.

The S&P 500 (SPX) closed .22% lower compared to Friday's close, but the index ticked higher during the day and closed the session above its open. The Dow Jones Industrial Average (DJX) gapped and closed lower on the day, dragged down by Boeing's (BA) bad news, but the Nasdaq 100 (NDX) rose sufficiently throughout the trading session to close nearly unchanged.

The general rally after the open seems to imply investor optimism, but other indications run counter to that notion. Consider the chart below which shows the performance of the Russell 2000 (RUT) as tracked by iShares Small Cap index ETF (IWM). The chart compares that ETF with State Street's S&P 500 index ETF (SPY). If investors are optimistic, then why are they selling the small cap stocks down so decidedly over the past two sessions compared to the larger cap stocks?

Utility Sector Shows Early Flight to Safety

At times lower volatility can be a bullish indicator for the markets at large. While it is true that Utility stocks have a consistent pattern of lower volatility and predictable dividend yield, this sector indicates a different reason for its low volatility. Utility stocks' typical performance makes them attractive stocks to buy and hold, but it also makes them attractive to fund managers who are worried about what might happen in the next few months. Stocks in the utility sector are where money goes to hide from danger. If the market is about to experience a storm, utility stocks are the proverbial safe port in which to wait it out.

Could that be the reason for the sector's recent performance? The chart below shows how the sector's surge has led it to outperform the S&P 500 over the last two months. Nervous investors thinking the market needs to correct would certainly find this sector attractive, and their movement there might be a signal to pay attention to.

Read more:

Adobe Shares Surge with Massive Demand

Cybersecurity Stocks Like CyberArk See Big Demand

Tough Year Ahead for Netflix Shareholders

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Netflix Earnings Rate as an Anticlimactic Performance

After the market closed, Netflix (NFLX) reported earnings that were largely in line with analysts' expectations. The chart below, captured just before the close, shows how option sellers had priced their anticipation of the company's earnings report.

The expectations for good news had the option price range significantly higher (green area), even approaching prices from earlier in the year before NFLX shares dropped after the quarterly earnings report at that time. Pessimistic expectation priced options significantly lower (red area), but the first 30 minutes after the report was released showed that trading remained in between these two areas.

On the one hand this is good news for investors because it means the expectations were not overdone. On the other hand, it is disappointing to investors who hoped to see a return of growth for the stock. As the stock opens tomorrow, the price may drift towards one range or another. The direction it moves may prove to be an indicator for the larger market overall as this company is the first of the FAANG stocks to report.

The Bottom Line

Stocks opened lower but ticked up throughout the day. The S&P 500 and Nasdaq 100 closed higher, but the Dow Jones Industrial index and the Russell 2000 index closed lower on the day. Utility stocks seem to be surging echoing the signs of investor nervousness. Netflix earnings didn't show much in the way of hints about where the market is headed next.