foxex: Relative Strength

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, March 23, 2020

1. Bond and gold prices surge as oil and volatility fall further

2. Investors like Facebook and shun Boeing

3. Home appliances no, but robots yes?

Market Moves

Bond and gold prices posted their best single-day gains in over a decade as investors took their flight to safety seriously. Stocks fell over 2.5% while oil prices fell 16%, even though the CBOE Volatility Index (VIX) also fell significantly.

While most individual stocks performed within the expected distance of their benchmarks, one important trend has emerged over the past three days. Small-cap stocks aren't declining in price as much as large-cap stocks. The chart below tracks the relative strength between State Street's S&P 500 index ETF (SPY) and iShares Russell 2000 index ETF (IWM) by dividing the former by the latter. The pattern that is revealed shows three days of decline for this measure. This interesting phenomenon shows that at least some buyers remain eager to jump in and buy stocks that show potential to bounce back furiously.

Even so, the VIX remains high. Today's six percent drop occurred as markets slid lower, demonstrating that informed sellers think the downward velocity will continue to slow. However, astute chart watchers know that stocks can fall lower even as volatility drops, and that the COVID-19 news is likely to sound worse before it gets better.

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Investors Like Facebook and Shun Boeing

In times past, when a bear market came along, stocks in the Dow Jones Industrial Average (DJI), as a rule, fared better than stocks in the Nasdaq 100 and S&P 500. That phenomenon does not appear to be playing out this time around. The chart below shows a relative strength comparison between Invesco's Nasdaq 100 ETF (QQQ) and State Street's Dow Jones Industrial Average index ETF (DIA). This chart shows what would have happened to a portfolio that had bought Nasdaq 100 stocks, and sold-short the industrial stocks. It makes sense when you think about it. For example, though Facebook (FB) slid into bear market territory with the rest of the FAANG stocks, both it and Netflix (NFLX) seem to have held on just a bit better than others. Investors expect these stocks to retain value in a pandemic-driven world.

This creates an interesting new phenomenon, one that says investors prefer newer technology to tried and true companies, even so much that they consider these newer technology companies as safer than many of the old guard. This will be important to factor in as we read charts that seem to imply a market bottom is near.

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Home Appliances no, but Robots yes?

Working at home is the new normal. So much so that many people are having to split computing resources with significant others in the home. Families with children home from school are likely to face some of their most trying challenges yet. In the midst of all this, there will be more household chores to be done around the house not less, and meanwhile, cleaning-maid services are not an option in most people's minds.

While it is equally true that big-ticket appliance purchases are simply not a priority right now, there is one appliance that may be still on the "wait, let's consider it" list. iRobot Company (IRBT) pioneered the Roomba and spawned a flurry of similar products. Today, such technology sounds pretty handy, and investors seem to have taken notice.

The chart below compares shares of IRBT with State Street's Consumer Discretionary sector fund (XLY), Home Depot (HD) and Whirlpool (WHR). While the latter three are hard hit, the Roomba maker is holding out well during the pandemic.

The Bottom Line

Stock indexes closed lower, even as the VIX dropped. That bullish indicator is still early as bond and gold prices rose so strongly that it demonstrated investors' urges for a flight to safety. Small stocks are showing signs of stealth buyers, and investors prefer new tech to old guard stocks, thus the Roomba maker's shares might be worth reviewing.