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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Wednesday, April 15, 2020

1. Bond prices jump as stocks drop

2. Transportation stocks forecasting doom?

3. Finding value at home

Market Moves

Bond prices moved higher as stocks gapped down and held. The S&P 500 index (SPX) closed two percent lower, while the Nasdaq 100 index (NDX) closed one percent lower today. The iShares' 20-year Treasury Index Fund (TLT) closed 2.65% higher as investors anticipate lower interest rates for an extended stretch.

This outcome followed earnings reports from Goldman Sachs (GS) and Bank of America (BAC). Goldman Sachs actually beat revenue estimates, which were earlier revised lower, and the stock closed just slightly in positive territory compared to yesterday's close. BAC shares dropped over six percent on less positive news. However, despite the market's current difficult circumstances, investors generally remain optimistic and seem to be looking for value investments. After such a significant drop in the broad market indexes, many more stocks than usual appear to have more attractive fundamentals. Over 11 stocks can be found today that meet the criteria set out by the original value investor Benjamin Graham.

However it is unlikely that anyone suspected that stocks showing similar metrics would have been found under the current circumstances. In fact some stocks show attractive fundamentals, but not for any good reason. Consider the chart below that displays a monthly look at the price of Exxon Mobil (upper panel) compared with the price-to-book ratio of the company (lower panel). This is the first time in the last two decades the stock has ever traded at this low measure, however it may be risky to buy this stock now while the market is so volatile.

Transportation Stocks Forecasting Doom?

Charles H. Dow, original editor of the Wall Street Journal and developer of Dow Theory, suggested that valuable information could be gleaned from comparing the industrial sector stocks and transportation sector stocks. Nowadays such a thing could not be easier. The chart below displays a comparison between iShares' Dow Jones Industrial Average index ETF (IYY), and their Transportation index ETF (IYT).

Dow's bearish signal was evident when IYT began making lower highs while IYY kept making higher ones. Today, the confirmation of this trend seems apparent as IYY is still heading higher though IYT shows a weaker rebound. Clearly the oil market's dynamics are weighing on the transportation index and creating this bearish looking chart, but Dow never suggested that fundamental factors were a part of his theory. The reason for such a dour look on this chart, ephemeral as it might be in the midst of the COVID-19 pandemic, was not a matter for consideration to Dow who was fond of saying, "price discounts everything." Chart watchers should take careful note of Dow's theory these days.

Read more:

Dividend Stocks Could Be Headed Higher

Airline Deal Takes Off As Planes Stay Grounded

Tesla Earnings: What to Look For

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Finding Value at Home

With everyone working, schooling, and shopping at home, it stands to reason that restless homeowners are more prone to find something that needs a fix nowadays. A trip to a roomy, big-box home-improvement retailer can be a refreshing break for a moment. Just don't forget your mask because you're likely to encounter more humans there than you have anywhere else in weeks.

The chart below implies that investors expect something to come of the fact that the parking lots at Home Depot (HD) and Lowe's (LOW) stores have been comparatively more full the past several days. While value stocks tend to take months or years to rebound strongly, these home value stores may rebound a lot sooner than that.

The Bottom Line

Stock prices fell and bond prices rose as investors realize there is still a ways to go before everything resembles anything close to normal life. Exxon Mobil shares may take months to return to normal price-to-book ratio scores. Eager buyers should take a cautionary signal from Dow Theory which suggests this downward market move is not yet over. Meanwhile bullish investors should check out home-improvement retailers.