foxex: WHO Says

Chart Advisor | Focus on the Price

Thursday, January 30, 2020

1. Amazon smashes through expectations with earnings beat

2. Investors nervous but excited

3. Utilities still on the rise

Market Moves

Amazon (AMZN) reported earnings immediately after the close of the market and the stock jumped. A lot. The news was so good that investors and analysts will likely decide that over the past three months, where AMZN shares had lagged behind the market averages, investors were wrong and completely under-pricing the company.

Consider the chart below, which displays the zones where option market makers priced the post-earnings move. The prices, based on implied volatility, were set for a probability that the stock would move $60 higher if the news was good, or $60 lower if the news was bad. Option markets show repeated expertise at pricing such moves, as evidenced by the recent moves in Apple (AAPL) and Microsoft (MSFT). In both of those cases the pricing perfectly limited the post-announcement surge. However, not even the option pricing was properly prepared for Amazon's stellar quarter. AMZN share prices rocketed higher after the news and will likely gap higher well above $2000 per share tomorrow at the open.

The importance of this news is that the influence earnings on the Nasdaq 100 index (NDX) will likely push the markets higher in the days to come. The S&P 500 (SPX), the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) all closed higher today once the World Health Organization (WHO) released a report that they were really going to get to work on the Coronavirus. The news had quite a bit of impact considering that the session today opened a good bit lower than yesterday's close.

Investors Nervous but Excited

With investors fears about the Coronavirus calmed somewhat, stocks rose strongly in the final hours of the trading session. But both implied and realized volatility remain elevated. Consider the chart below which compares State Street's S&P 500 index ETF (SPY), with the Volatility Index (VIX) and the 5-day average true range as a percentage of SPY (blue line). Astute chart watchers will recognize that though investors wanted to rapidly buy up stocks today, the nervousness remains and prices could fall back equally fast on bad news. If these measures aren't convincing enough, consider the behavior of utility sector stocks in today's session.

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Utilities Still on the Rise

If investors are no longer worried about the China-originated Coronavirus, then stocks should, in theory, rebound to their former highs in short order, since the majority of the reason for the drop last weekend was based on those fears. But that doesn't explain why investors pushed utility stocks up by nearly one percent today. State Street's Utility Sector index ETF (XLU) was three times as bullish as the S&P 500 index today.

The chart below shows what XLU share performance has looked like since the start of 2020. It may seem intuitive to expect that if news came out alleviating investor fears that XLU would no longer continue to outperform the broad market index. That's because the utility sector usually only outperforms the market when investors are nervous. The second chart below shows that the news from WHO did nothing to stem the money flowing into the sector. In fact the price even accelerated after the news. This seems to imply that there remains a large contingent of skeptics who still think the Coronavirus, or something worse, is still a cause for concern.

The Bottom Line

Stocks displayed an impressive rebound, setting the stage for Amazon's big news. The stock (AMZN) and the broad market indexes will likely open higher to begin tomorrow's session. However, investors remain nervous as evidenced by the price action in the Utility sector today.