foxex: Calm in a Storm

Chart Advisor | Focus on the Price

Thursday, March 05, 2020

1. Market risk may be priced too high

2. Looking at Costco earnings for clues

3. Your next strategic ETF

Market Moves

Bond yields fell again to historic lows, closing lower for nine out of the last ten trading sessions. This also drove bond prices to new highs. Gold prices also closed at new highs even as stocks fell three percent from yesterday to close today's session. With such turbulence going on, one might not be surprised to read that the Volatility Index (VIX) closed near 40, a level associated with severe downward market prices.

Yet the VIX fell noticeably in the last twenty minutes of trading (see chart below). A 5-minute-period comparison of the VIX, shown by the red candles, and the State Street's S&P 500 Index ETF (SPY), shown by the green candles, makes it clear that while most of the day's trading was inversely symmetrical, the final four candles of the day revealed a subtle difference. The VIX fell further than the SPY rose. This is a very mild sign that option sellers let option prices deflate a bit going into the close. They would only do that if (A) option buyers backed off, and (B) the sellers didn't expect as much risk in tomorrow's session anyway.

These signs can easily be overrun by panicked sellers tomorrow, but it is possible that they won't be. For additional evidence of this quietly hopeful outlook, chart watchers only need to look at Costco's (COST) earnings report that came just after the close today.

Looking at Costco Earnings for Clues

On most occasions Costco isn't usually an important bellwether stock. Its shares are not calculated into the benchmark indexes with the same weight as Apple (AAPL) or Microsoft (MSFT). However, under the current circumstances anyone who shops at Costco knows that recent crowds there have driven inventories uncharacteristically low on various staples such as water, toilet paper and canned beans because...that's right, Coronavirus.

So it's worth zooming in to hear the outcome of their earnings reports to glean how the general sense of concern is affecting customers and investors alike. The chart below shows how things went. Costco beat the analysts' sales and profits estimates by a little bit, which was good news. But investors had already priced in that news apparently. The good news here? Hoarding at Costco didn't actually reach legendary levels. Likely a sign that people are approaching the current headlines with a larger measure of calm than the headlines would seem to imply. Ergo, the market may not sell lower from this point forward in a crazy panic. Here's hoping.

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Your Next Strategic ETF

During times when market prices greatly fluctuate, it's useful to take a look around and see what worked and what didn't. These times will come again and a little knowledge can help investors be better prepared for the next bout of volatility.

The chart below compares five specific-strategy ETFs with the Invesco's Nasdaq 100 index ETF (QQQ). These include iShares' Clean Energy ETF (ICLN), O'Shares' Global Internet Giants ETF (OGIG), Direxion Russell 1000 Growth Over Value ETF (RWGV), Invesco S&P 500® Low Volatility ETF (SPLV), and State Street's Russell 1000 Momentum Focus ETF (ONEO).

The ESG investing mandates appear to be helping the clean energy strategy get through this market swoon without too much pain, but OGIG, the internet giant ETF is a bit of a surprise and may be worth a deeper look.

The Bottom Line

As bond prices continued higher and yields lower, stocks rose significantly and gold prices jumped. The final readings of the VIX and Costco's earnings give quiet hope that this selling in stocks won't last too much longer. Keep an eye on five special strategy ETFs to see how they play out through the end of this market correction.