foxex: Pullback Underway

Chart Advisor | Focus on the Price

Friday, January 31, 2020

1. Indexes show a rising trend of volatility in the markets

2. Where investors go to hedge

3. Are FAANG stocks the new blue chips?

Market Moves

Despite Amazon (AMZN) delivering surprisingly good earnings yesterday, the broad market indexes sold off. The U.S. State Department's issue of a no-travel recommendation this morning regarding diplomats going from the U.S. to China coincided with a sell off in the day's session. The markets closed near their lows for the day and are poised to continue lower in the coming week.

The Volatility Index (VIX) establishes its price levels based on the implied volatility present in the pricing of options on the S&P 500 (SPX). The chart below compares the VIX index, two price charts of VIX futures, and SPX. While the S&P 500 closed two percent lower, making a lower low in price, naturally the VIX and the two VIX futures contracts are making a higher-high in price. When the VIX breaks out to a higher high after a prolonged move upward by stocks, it is often a signal that market prices will pull back further in the weeks ahead. Indeed the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) also closed significantly lower today, with no particular sign of persistent buying late in the session.

Where Investors go to Hedge

With investors fears about the Coronavirus reignited on a slew of panic-charged news items, investors had to look around and decide where their money should go instead of where it already was. The chart below identifies some of the usual suspects which may be considered for use as hedge instruments.

This chart compares futures contracts on the U.S. Dollar, Bitcoin, Gold and Bonds. Since October these commodities are generally stronger, however only the U.S. Dollar (DX) and Bitcoin futures (BTC) have been able to outperform the S&P 500. Though gold and bond prices are on the rise, the move has only begun to take place since the turn of the year.

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Are FAANG Stocks the New Blue Chips?

One curious observation in the midst of this panicked selling of shares, comes from the way the FAANG stocks are performing. The chart below shows how a portfolio of FAANG stocks compares to Invesco's Nasdaq 100 index ETF (QQQ). Since these companies had the tendency to lead the market on the way up, it would seem only natural that they should lead, or in other words fall further, on the way down. But this is not what has occurred so far. In the past, when markets fell, investors tended to move their money to blue-chip stocks, which would not fall quite as far as the overall market indexes. Under the current circumstances, highly capitalized technology stocks seem to be filling that role instead.

The Bottom Line

Stocks fell strongly on new Coronavirus fears. The pattern of price movement in the Volatility Index suggests that price drops may still continue into next week. The U.S. Dollar and Bitcoin seem to be acting as interesting hedge instruments, suggesting that investors are merely moving their money to cash. However FAANG stocks also seem to be taking on the role of blue-chip stocks in the current market environment.