foxex: Bonds Bust

Chart Advisor | Focus on the Price

Tuesday, March 10, 2020

1. Why utility stocks fell

2. Coronavirus impact shows optimistic outlook

3. GM might rebound but Autozone already did

Market Moves

Bond prices fell. A lot. The chart below shows that the price of the long bond gave up as much in the last two days as it had gained through the first two months of the year. A parabolic, bubble-like price dynamic like this one is what make chart readers wary of buying in when prices are at the highest ever recorded.

The chart is a daily look at the price of iShares' 20+ Year Treasury Bond ETF (TLT). The stunning rise and fall of this price mirrors the historic drop in interest rates which dramatically reversed over the last two days. With interest rates on the rise, dividend paying stocks, such as those in the utility sector, become less attractive. The flight out of these stocks today was also dramatic.

The utility sector, as tracked by State Street's Utility Sector index ETF (XLU) closed higher by one percent. On any other day that would be a good outing. However, today when the S&P 500 index (SPX) closed five percent higher, it is a paltry performance. It is important to recognize that XLU was down as much as three percent during the middle of the day's session. The fact that so much money is coming out of Utility sector stocks means that fund managers are looking to rotate their cash into another sector. Could it be this is a sign that the selling is about to end?

Coronavirus Impact Shows Optimistic Outlook

The chart below contains a comparison of the relative performance of several country-index ETFs from iShares, including ones representing China (FXI), South Korea (EWY), Australia (EWA), Spain (EWP), the U.K. (EWU), Italy (EWI) and Brazil (EWZ), with an S&P 500 index ETF (SPY). Surprisingly, the country with the largest number of cases on this list is faring better than all others, while the country with the least number of cases is doing far worse.

The impact of recent events on Brazil's economy likely has more to do with the collapse in oil prices than with COVID-19, but of course those events are related. Even so, chart watchers will take notice that EWZ is rebounding at a steeper angle than all the others. Is it possible that the slowing of the rate of new cases from China and South Korea is giving investors at least a moment of optimism for now?

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GM Might Rebound but Autozone Already Did

The chart below shows that investors are already taking a defensive position. Experienced market watchers know this bit of conventional wisdom: if times are tight, people put off large discretionary purchases. Like a car. That means they are likely to continue driving, and fixing, their current car. Thus in recessionary times, or in anticipation of such, investors typically expect that an auto parts store will outperform a car manufacturer.

That is probably why shares of Autozone (AZO) are doing so much better than shares of General Motors (GM), despite the latter's two-candle pattern that seems to show support. GM could become a good buy if the market rebounds, but if investors stay fearful, AZO is the better bet.

The Bottom Line

A rapid rebound, that finished strong at the close, followed on from yesterday's drastic sell-off. Meanwhile bond prices completed a two-day reversal from their dramatic highs. The impact of the Coronavirus is being felt heavily around the globe, despite relatively small numbers of people who have caught it. So much so that car manufacturers may have a tough time of it in the days ahead.