foxex: Renewed Hope

Chart Advisor | Focus on the Price

Tuesday, February 04, 2020

1. Investors show optimism, but maybe they shouldn't

2. Emerging market indexes struggle to rebound

3. Alphabet earnings didn't scare away all investors

Market Moves

The major U.S. stock market indexes extended their rally in a strong upward move today. The S&P 500 index (SPX) and the Dow Jones Industrial Average (DJX) both closed 1.5 percent higher on the day while the Nasdaq 100 (NDX) cleared a two percent increase. It could have been higher but the indexes retreated slightly going into the close.

Renewed optimism washed over investors because none of the headlines from the Coronavirus, the Iowa caucus results, or Google earnings, were as bad as feared. Investors took the opportunity to buy the dip, but it is possible they should be exercising caution instead.

The chart below tells an interesting story as it compares the London-based FTSE 100 index futures with the S&P 500. For years there has been a positive correlation between these two. Notice how in 2018 these indexes diverged for several months, culminating in a significant correction late that year. Is it possible that a similar dynamic may be currently underway? This is the first week in a post-Brexit world, so perhaps a new dynamic will take over, but investors should keep an eye on this relationship.

Emerging Market Indexes Struggle to Rebound

The latest Coronavirus numbers seem to indicate that while the number of cases continues to grow the trajectory has slowed. The impact on investor perception has probably hit emerging markets heaviest. The chart below shows that the so-called BRIC countries have had a rough time of it as of late. The past two days have brought increases in these index-driven ETFs for Brazil (EWZ), Russia (RSX), India (EPI) and China(FXI), however the increases haven't been enough to break loose from the short-term downward trend they seem to be stuck in. Some analysts had suggested late last year that now might be a good time to hedge U.S. investments with Global selections. That doesn't seem like such a great suggestion at the moment.

Read more:

3 UK Charts to Watch

Coronavirus Taking Toll on Travel Stocks

Alphabet Stock Trading Sharply Lower After Quarterly Miss

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Alphabet Earnings Didn't Scare Away All Investors

Before earnings were released, option sellers had priced their estimation of where the share prices for Alphabet (GOOGL) might land. Option-selling market makers attempt to set prices for such an event at the one-standard-deviation threshold, or roughly 70 percent probability. This technique is surprisingly accurate as it worked to perfection for Apple (AAPL), Microsoft (MSFT) earnings, though it missed on Amazon (AMZN) results.

The chart below shows how things went for Google. The initial price response in the first five minutes after Alphabet's report showed shares drop right to the option sellers' bad news point. Perhaps the biggest disappointment that drove this result was the news that the company reported revenues from YouTube officially for the first time, and they came in at about half of what was expected. That being said, the user-content website drove revenues of 15 billion last year. Not exactly chump change. Meanwhile Google's earnings were actually quite impressive with 17% growth year over year. Consequently, there were still people buying shares throughout the day's session.

This result is significant for all investors to notice because it demonstrates the ongoing ambivalence in the market right now. This is yet more evidence that continued volatility is ahead.

The Bottom Line

Stocks rose strongly on the day as investors decided to buy the dip, sending indexes one to two percent higher. Global indexes rebounded today as well, but look less inviting than U.S. based indexes. Google's earnings report was a mixed bag, and the company didn't sell off drastically, signalling that investors aren't scared away from the markets yet.