foxex: Subtle Warnings

Chart Advisor | Focus on the Price

Monday, January 06, 2020

1. Dow theory gives a subtle warning signal

2. Volatility indexes adjust asynchronously

3. Amazon and Netflix surge higher

Market Moves

Commodity markets gapped up and worked their way lower, while stocks seemed to do the opposite today. While the S&P 500 index (SPX) closed almost one-half percent higher today, an interesting divergence appeared between transportation and industrial sector stocks. The comparison of relative performance between these two sectors is a basic tenet of Dow Theory, a 100-year old set of rules for analyzing market trends.

The theory goes that if transportation stocks underperform industrial stocks, this signal, combined with other factors, can be a leading indicator of overall market strength or weakness. While the current market does not warrant a bear-market alert based on Dow Theory, the diverging performance over the last month is nonetheless interesting as it may imply an early warning of falling prices overall.

The chart below shows that the industrial sector, measured by the Dow Jones Industrial index (DJI), looks markedly stronger than the Dow Jones Transportation index (DJT) over the past month of trading. This might be easily explainable if the market were anticipating poor sales through the previous retail season, but with reports of record sales days at least twice over the last six weeks, it isn't likely to be the case, and therefore the signal comes at an odd time. It is possible that the price action is telling a story of added risk that hasn't been fully quantified by investors yet.

Volatility Indexes Adjust Asynchronously

While the major market indexes closed higher, it would be natural to expect the Volatility Index (VIX) to close lower. Which it did. However, the Chicago Board of Options Exchange (CBOE) calculates a similar index based on the Nasdaq 100 (NDX) instead of the S&P 500 (SPX). While the VIX fell in line with market actions, the Nasdaq-volatility index (VXN) actually rose just slightly.

In isolation this action would imply that traders today believed there was more risk to be accounted for in Nasdaq stocks than in S&P 500 stocks. Exactly why that should be seems odd unless the market is expecting more fluctuation from higher-beta stocks.

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Amazon and Netflix Surge Higher

The Golden Globes awards presentation last night made headlines today and drew attention to the movie industry. Some analysts noted that though Netflix (NFLX) lost out to other studios in the award count, the company won the battle of new investors in the market today. But it wasn't just Netflix that benefited. Shares of Amazon (AMZN), the other leading streaming company, rose in similar fashion.

The chart below shows that this sentiment is not limited to the morning after the awards show either. A comparison of an equal-weighted portfolio of the two major streaming companies, with an equal-weighted portfolio of five other film studios shows that investors continue to be comparatively bullish on streaming studios over more traditional developers of entertainment.

The Bottom Line

Stocks closed higher after starting lower, in contrast to commodities. Along with this contrast, transportation stocks seem to indicate the market may have risk of dropping a bit more in the near future. The risk indexes continue to anticipate more price pressure ahead as well. Meanwhile Netflix and Amazon showed well the day after the Golden Globe awards were given out.