foxex: Cash Only

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, March 19, 2020

1. Yields pull back but bonds underperform

2. Walmart vs. Amazon

3. Remote education shows opportunity

Market Moves

Stock indexes tried to find support and seemed to do so for most of the trading session. Investors still remain fearful as indicated by the patterns playing out in bond prices and yields, currency trading, and volatility index measures.

The CBOE Volatility Index (VIX) remains high (above 72) even though it fell by five percent or more from yesterday's close. This was in greater proportion to the amount that the S&P 500 Index rose (SPX), so though extremely subtle, that difference is a positive sign that investors may be ready to calm down soon.

However, bond prices didn't rise as much as bond yields fell. That is important because, as chart watchers know, those two should be strictly inversely correlated. The chart below compares the yields for the 30-year Treasury index (TYX), the 10-year Treasury Index (TNX), and the 5-year Treasury index (FVX). Note how the longer-term bond yields look better than the short term yields. This pattern reflects the sensitivity to interest rate changes, but it also implies the greater demand for shorter-term bonds.

In bear-market climates this behavior isn't too surprising because people don't trust anything long term. Another way of looking at this is that even though Italy is further along the progression of dealing with the COVID-19 outbreak in its country than the U.S., currency traders much prefer U.S. dollars to euros right now. This is also exacerbated by the European Central Bank's announcement on monetary policy.

That explains why not even high quality corporate bonds are attractive right now (even though they probably should be). In the chart below iShares High Yield Corporate Bond ETF (HYG) has not responded to interest rate changes, it has simply gone down. When people sell out of their investments, they trade them in for cash, most often, U.S. dollars. This flight to cash will continue until investors are ready to dip a toe back in the water. But as the second chart below shows, today is not that day.

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Walmart vs. Amazon

The COVID-19 outbreak has people ordering things online. So it isn't too surprising that Amazon (AMZN) is doing well right now, but what is more surprising is that Walmart (WMT) is doing even better. That's because even though it is the champion of brick-and-mortar retail stores, the company has parlayed that position into a formidable e-commerce force. Ordering online and picking it up at a Walmart store makes a lot of sense for some people who don't want to waste a trip to the store if they don't have to, but also don't want to wait until later in the week to get what they want (think kids in college).

The chart below shows a comparison of the two. Both of them will have to hold above their 50% Fibonacci retracement levels in order to continue higher in the next few days, but Amazon failed at that late in today's session.

Read more:

Walmart Shares Zoom to All-Time High

ECB Announces €750 billion Stimulus, Declares No Limits on Policy

Strategies for a Bear Market

Remote Education Displays Opportunity

If and when the market rebounds, among those companies that might do well are those offering education and retraining solutions whether in person or for online learning. Four well-capitalized companies, Chegg (CHGG), Aspen Group (ASPU), Laureate Education (LAUR), and GP Strategies Corporation (GPX), rebounded strongly today as investors realized their potential.

The Bottom Line

Stocks barely held on to positive ground by the end of the day, but showed tepid signs of support even as the Volatility index fell lower. Bond prices and especially corporate bond prices, fell today in such a way that implies investors still want cash over anything else. Walmart and Amazon are set for a clash-of-titans face-off in this time of heavily used online shopping channels.