foxex: Passed Peak

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, April 06, 2020

1. Markets anticipate the end of COVID-19

2. Are oil markets predicting end of bear market?

3. Buy Apple not Berkshire

Market Moves

With such bad news on Friday from the March non-farm payrolls report, it seems hard to understand exactly why investors lifted stocks seven percent higher today. Likely they are anticipating the end of COVID-19 based on the earliest glimmer of hope from some reports that the virus has passed its peak in some countries. It is possible that hope is premature and that investors should remain prepared for continuing volatility in the markets, as the chart below suggests.

Comparing the CBOE Volatility index (VIX) from recent days with the historical tracking of the VIX during the 2008-2009 financial crisis, the charts look fairly similar. Once you realize that the chart on the left is measured in days and the chart on the right displays a weekly time frame, then you begin to wonder exactly what is going on with the markets right now.

The fact is that a typical bear market usually lasts much longer than what we are currently experiencing. But then again no bear market in the past 100 years was triggered by a virus pandemic, and the one connected with the Spanish flu (101 years ago) was much slower moving and far less pronounced in its market impact.

Two possible explanations, oversimplified though they may be, present themselves: (1) this is not a true bear market, just a bear-market-like scare created by the pandemic and (2) there is something bigger afoot in the market and it isn't done playing out.

Are Oil Markets Predicting End of Bear Market?

If we consider the first of the two previously mentioned explanations first, then we would naturally look everywhere for signs that the bear market is about to end and that stocks will rebound. Oil prices gained substantially on Friday on hopes that the OPEC nations would, at their video-meeting today, decide to cut production. But oil prices fell as there seemed to be little agreement on how to cut production if the U.S. was not part of any production limits set by OPEC.

It's a fair question for any OPEC nation to consider, but even more importantly it is a tacit admission of the fact that global production capacity can create much more supply than the amount of energy consumers today demand. That is likely pointing to explanation # 2 (which we will consider tomorrow, stay tuned).

Meanwhile the chart below shows that oil stocks in three different industry segments do indeed look like they are beginning patterns that signal a new upward trend. The chart compares the price of Crude Oil futures (CL) with the three largest capitalized stocks in the U.S. in three industry segments: Integrated Oil and Gas, Exxon Mobil (XOM); Refining, Valero (VLO); and Equipment and Services, Schlumberger (SLB).

Each of these segments looks ready to rebound even before Oil showed the possibility of moving higher, signaling investors consider all three of these stocks as bargains right now. The strongest stocks in the weakest industry are those you'd expect to rebound at the end of a bear market.

A Nasty, Short and Bitter Recession

Buffett's Berkshire Sells Airline Stocks Amid Crisis

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Buy Apple Not Berkshire

There is something else signaling that this rapid fall in price might recover much more quickly and more completely than anyone up until now had thought. The idea that investors like Tim Cook's style of investing better than Warren Buffett's may not occur to the average investor. It seems almost comical to compare the two side-by-side as investing professionals, however the chart below shows that the market is doing just that and not voting for Mr. Buffett's company.

A simple explanation goes like this: Apple (AAPL) is poised to take advantage of some very impressive opportunities in the near future, such as 5G, while Berkshire Hathaway (BRK.B) patiently waits for those opportunities to play out over several years. Investors don't want to wait. At least not now after the pandemic scared away about 30% of their planned retirement funds.

The Bottom Line

Friday's U.S. employment report should have scared investors away and prompted a big downward move this week, but it didn't. Quite the opposite. Indications that the COVID-19 pandemic might be quickly survivable brought investors back into the markets with an urgent determination. Oil stocks look good, but technology stocks look better.