foxex: Buyers Stay Home

Chart Advisor | Focus on the Price

Wednesday, February 26, 2020

1. Stocks slide again while gold and bonds hold ground

2. A top for Tesla?

3. The value of stay-at-home stocks

Market Moves

Bond prices moved a touch lower and the price of gold moved a touch higher. Stocks sold off for the fifth day in a row extending losses as the S&P 500 index (SPX) is now 8.5 percent lower over that period. However, not all stocks traded lower on the day, and there were some surprises regarding which ones closed higher. Apple (AAPL), 3M (MMM), and Netflix (NFLX) all closed higher despite the broad market indexes giving up ground.

It might be surprising that these stocks were bought up, however if you consider that the current market moves are largely COVID-19 influenced, you get that 3M company makes a lot of things people might buy, while Apple and Netflix have a lot to offer for people who want to stay shut in. This may be the emerging of a stay-at-home market for the next little while.

Meanwhile, the Volatility Index (VIX) remains elevated, but the option and futures pricing associated with the index give subtle indications that it may move lower before long, at least in the short term. Near-the-money VIX put options (a bet that the index will fall) are more than twice as expensive as near-the money VIX call options (the opposite bet). Just one week ago the reverse was true.

A Top for Tesla?

During times of market turbulence, chart watchers find it useful to keep an eye on high-flying stocks that seem buoyed up by little more than buyer enthusiasm. For right now, both Tesla (TSLA) and Virgin Galactic (SPCE) qualify for such designations. While either of them may yet prove to be as valuable as their share price, it is a long way from certain that it will be true any time soon.

So it becomes useful to watch these stocks and see if they maintain an upward trajectory, or if they have begun to descend from an apogee. In the case of TSLA, we could use the pricing of the weekly options to notice that they line up nicely with the Wolfe wave analysis we applied in an earlier edition of the Chart Advisor newsletter. Right now, option pricing for Tesla options expiring on March 13 show a 70% chance of a $100 move (either up or down) in the price of TSLA shares. A $100 move lower over that time would put the share price back in balance with its previous trend, and effectively call a top for the recent enthusiastic move in the stock (not to mention what it would imply for shares of SPCE).

However, if the stock doesn't pull back like that, then it would seem to imply that there are enough people in the market willing to risk holding for a longer term in Tesla, and that would imply they were quite bullish on the market in general. This subtle indication that the most bullish buyers in the market aren't panicking could have implications for the broader market.

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The Value of Stay-At-Home Stocks

An interesting observation can be seen in the chart below that likely relates to the COVID-19 scare. If you compare an equal-weighted portfolio of half Clorox (CLX) and half Netflix (NFLX) with an equal-weighted portfolio of Delta Air Lines (DAL) and Exxon-Mobile (XOM), you come up with this very interesting pattern that shows how, ever since the Coronavirus started making headlines, the stay-at-home stocks have drastically outperformed the lets-go-somewhere stocks.

The Bottom Line

Stocks extended losses today bringing the total pullback to greater than eight percent within the past week. The VIX seems poised to fall lower, and some stocks have shown subtle indications of buying. It is curious that shares of Tesla and Virgin Galactic haven't fallen, but they may yet do so.