foxex: Not Over

Chart Advisor | Focus on the Price

Monday, March 09, 2020

1. Ugly market rout could have been worse

2. Coronavirus fears still driving prices lower

3. Which stock should be a staple in your portfolio?

Market Moves

During the early Monday morning hours in the Asian markets, stocks and currencies sold off so dramatically that the Sunday session of trading in the futures markets did something it hasn't done in may years: it halted. When the stock market opened at 9:30 a.m. trading resumed for about ten minutes, and then halted again. Once traders and investors cooled off for several minutes, the markets resumed trading. The major stock indexes promptly moved 2.5 percent higher in the next 30 minutes.

However, in the oil futures markets, where no curbs were put in place, prices fell by the largest drop in over 30 years. Crude oil futures opened over twenty percent lower than their closing price on Friday. Does this terrifying drop signal how much worse it could have been for stocks without the halt to trading? It is likely true that the trading halt helped bring buyers back to the table. Yet the oil markets have an unusual dynamic at play right now. Regardless of what actually happens with Coronavirus outcomes, people are already panicked enough to cancel their travel and purchasing plans. This appears to be hitting the oil industry hardest.

The chart below shows a comparison of oil prices (contract ticker CL) and the CBOE Crude Oil Volatility index (OVX). Because OVX is inversely correlated to the price of oil, similar to the way the CBOE S&P 500 Volatility Index (VIX) is inversely correlated with the S&P 500 index (SPX), when OVX spikes higher, oil prices are dropping. In this comparison, which looks at a monthly chart going back to 2008, we see that the OVX has never been higher than it is today. This chart was captured two hours before the market closed, and the price of oil fell two dollars lower to close today just above $30 per barrel. Considering how high the OVX closed, it is likely that these prices are not the lowest we will see this season.

Coronavirus Fears Still Driving Prices Lower

It is stunning to think that the markets are being driven by Coronavirus news when the most reliable numbers from any nation with an infection of significant population size (South Korea) show that the number of new cases in that country have actually dropped for the third straight day according to the Korea Times. Meanwhile the death rate in that country is well below two percent and skewed heavily to the elderly. This matches statistics of normal flu viruses, so why the panic?

The answer isn't surrounding the virus any more, the market panic is actually centered on the fears of the response to the virus. People will stay home. From work, from school, from church, from everything, and that will be bad for the economy--or so market sellers seem to think. They seem to fear that these circumstances will likely keep people hunkered down long enough that large companies' businesses and national GDP statistics will be affected negatively, so they are moving money out of stocks now and into bonds. The chart below shows strong evidence that this is the case.

In this chart we see a side-by-side comparison of the relative performance of two sector ETFs from State Street. The Consumer Staples sector index (XLP) and the Utilities sector index (XLU), both of them compared to the S&P 500 index ETF (SPY). Typically Utility stocks outperform the market average in a downturn, and Utility stocks also seek to do well when interest rates fall (since their dividends make them more attractive alternatives to low-interest bonds). While the bottom half of the chart below shows utilities doing well over the past two weeks, as compared to the market average, it shows the consumer staples sector doing better (top half of the chart).

This can only be explained by the notion that cloistered individuals will still need to hoard things from their local food and drug stores. So despite what is happening with bond rates and dividend stocks, scared investors prefer to put their money with a company like Walmart (WMT).

Which ETFs Have Outperformed Through the Selloff

Is It Time to Buy China Stocks?

Video Conferencing Stocks Could Offer Opportune Profits

SPONSORED BY FIDELITY INVESTMENTS
Putting Your People Skills to Work
Do you thrive on helping people? Financial services has an array of roles that could be a great fit. Here's why being a people person is perfect for a job in finance.
Learn More »

Which Stock Should be a Staple in your Portfolio?

On Friday it was consumer staple sector stock Walgreens Boots Alliance (WBA) which had inspired investors in the face of Coronavirus fears. Today its Walmart (WMT). As the chart below shows, Walmart shares have held on through the recent market volatility. When you consider that only Walmart has been able to pose as a rival to Amazon's online shopping prowess in even a small way, it isn't surprising that this company is doing well in an era that many think will soon be characterized by hearing people say "just leave my online order at the mailbox thank you."

The Bottom Line

In what may be the ugliest market day in most people's memories, stocks traded lower and couldn't maintain any of the buying intraday, closing near where they opened after a catastrophic drop over the weekend. While stocks had it bad, oil prices had it worse. Consumer staples stocks seem to be on pace to do better than utility stocks as they ride out the coming volatility.