foxex: Buy the News

Chart Advisor | Focus on the Price

Thursday, March 26, 2020

1. Stocks move still higher but the VIX won't fall

2. Is Bitcoin for real?

3. Sectors show realignment

Market Moves

An interesting thing happened on the way to the market opening this morning. The Jobless Claims report was published with a number doubly worse than what it was expected to be. That should be bad news, but stock indexes closed between five and six percent higher by the close of the session.

Chart watchers observed this dynamic throughout 2010 and 2015. News traders had to be aware that if the news was really bad, that was good for the markets, because it would likely bring more quantitative-easing-style intervention by the Fed. The action in the markets today was clearly a response to the swamp-thing stimulus package and the idea that it should likely grow in size as it makes its way to the House because the numbers were even worse than expected.

But even though the markets rose, the CBOE Volatility Index (VIX) stubbornly held its measure above 60, a significantly bearish mark. Option sellers seem to be willing to relinquish an added measure of option premium only if the market can pry it from their cold clutches. Keeping the VIX that high means that option sellers still see continued volatility in the markets, and that means a significant chance that the indexes will hit new lows before long.

Is Bitcoin For Real?

When markets go crazy, it helps to get perspective. The chart below provides a high level look at the major asset classes and how they have performed so far this year. It compares State Street's S&P 500 index ETF (SPY) with iShares' 20+ Year Treasury Bond ETF (TLT), State Street's own SPDR Gold Trust (GLD), the U.S. Dollar currency index (DXY), and the spot quote from Bitcoin Futures (BTC).

The chart shows an interesting comparison of Bitcoin's performance. The leading cryptocurrency did not hold on to its gains, but it didn't drop any further from the beginning of the year than the S&P 500 did. It clearly has more volatility than other assets, but much less than it has had in the past. Additionally, the price pattern is not terribly different from the other assets. Might this be the beginning of a period where Bitcoin begins to be considered as a legitimate asset class for investing purposes?

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Sectors Show Realignment

As the first quarter of the year draws to a close, and with the recent three-day rally on the books, it is useful to compare the performance of the major sectors in the markets. This kind of sector analysis helps investors recognize where money is likely to flow in the months ahead.

The chart below compares State Street's SPDR sector index ETFs for Technology (XLK), Utilities (XLU), Staples (XLP), Healthcare (XLV), Discretionary (XLY), Basic Materials (XLB), Industrials (XLI), Financials (XLF) and Energy (XLE) with the S&P 500 (SPY). The second chart below compares the same ETFs, but shows their performance since the end of last week. In looking at the two charts it is interesting how much change is apparent. In particular the Energy sector, once lagging badly, is now leading the group. This change of dynamic may be only temporary, but it is significant enough to expect that it may portend things to come.

The Bottom Line

Despite the bad news from the jobless claims numbers, prices continued to rise, while the VIX held to a level above 60. A comparison of assets and sectors over the past three months reveals that the current bounce in prices is driven by optimism that the worst of the COVID-19 pandemic may soon be here and gone.