| Friday, April 24, 2020 1. Market Recovery Pauses, Volatility Breaks Down 2. Oil Trading: USO vs. XOP 3. Dollar Near Long-Term Highs Against Euro Market Moves While the major U.S. large-cap indexes all rallied on Friday more than 1%, the weekly picture wasn't as rosy. The S&P 500 lost well more than 1% on the week given the extreme crude oil volatility that rocked equity markets earlier in the week. During the latter half of this past week, however, stocks were buoyed by a partial recovery in oil prices as well as continued stimulus and relief efforts, both monetary and fiscal.
For its part, the Fed has introduced an extensive program of asset purchases, and President Trump just signed a bill on Friday intended to provide $484 billion of relief for small businesses and hospitals. In the week ahead, we'll see more about how the economy is faring through the current pandemic as well as some more clarity from the Fed on its stimulus efforts. Next Wednesday features the Advance U.S. GDP reading along with the Fed's FOMC statement and press conference. Then, next Friday, the U.S. Manufacturing PMI survey will be released, which indicates the health (or otherwise) of the manufacturing sector.
From the market's perspective, recovery momentum still leans to the upside for now, but this week represented another pause in that momentum. One hopeful sign lies in the VIX (Cboe Volatility Index), or the market's "fear gauge." The VIX has been trending sharply down, as the chart below shows, since its peak in mid-March. On Friday, the volatility index broke down below its mid-April low around 37. In no way does this indicate clear sailing for equity markets, but it is a sign that investor sentiment continues to improve and that extreme market fear continues to abate.  Oil Trading: USO vs. XOP
This extremely unusual event in the futures market structure resulted in a massive problem for the USO (United States Oil Fund) ETF, which is based on futures market pricing in different near-month contracts. Long story short, USO plunged over 30% to just over $2 per share this past week, prompting the fund's management to begin making structural changes to the fund in efforts to avoid a complete collapse. On Wednesday, USO management announced a 1-8 reverse share split for USO to go into effect after the market close on April 28, 2020. A reverse split reduces the number of shares outstanding into fewer and proportionally higher-priced shares. Such an action typically signals a stock, or exchange-traded product, in distress.
But even without this unprecedented shift in the crude oil futures market, since USO is based on futures, a persistent phenomenon known as "contango" results in negative roll yield. In a nutshell, this simply means that much of the time, USO is being weighed down towards lower and lower prices. Therefore, if you're looking to invest in oil, it's probably not the best vehicle.
One alternative for getting some exposure to the oil and gas market without this contango effect is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). As the name suggests, this highly liquid ETF invests in energy exploration and production companies rather than being a pure oil play. So this leans more towards being a stock sector investment instead of a strict commodity trade. As usual, the charts tell a compelling story. No doubt that, like USO, XOP has also been hit extremely hard by the crude oil plummet. But as the chart below shows, XOP has begun to recover along with the overall stock market while USO looks irreparable, even given the reverse split that occurs next week. Year to date, XOP is "only" down around 50%, whereas USO is down around 80%. 
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Dollar Near Long-Term Highs Against Euro We don't often touch on how the U.S. dollar and other major currencies have been faring amid these exceptionally volatile global markets in the past couple of months. Well, currency markets have also been extremely volatile. A quick glance at the EUR/USD (euro vs. U.S. dollar) currency pair tells the story of relatively wild gyrations in the last few months.
Overall, the dollar has been trading higher. This is due in part to the dollar's status as a perceived safe-haven currency. The chart below shows that the dollar is not far off its nearly 3-year high against the euro (which is shown as the EUR/USD at nearly a 3-year low). A lot of the volatility in the currencies has to do with the back-and-forth monetary stimulus efforts of the relevant central banks (the Fed and the ECB). But the overall strength of the dollar against the euro can also be seen as a collective perception that U.S. stimulus and relief efforts in the face of the pandemic-driven downturn may result in a quicker recovery in the U.S. than in Europe.
In the week ahead, key events include monetary policy decisions from both the Fed (FOMC) and the ECB. These could both have a major impact on the EUR/USD going forward.  The Bottom Line Equity markets still appear to be on an upward trajectory, but this week saw a pause as crude oil volatility spooked investors. The USO exchange-traded product showed its weaknesses this past week as it had to be restructured in order to avert a complete collapse. The strength of the U.S. dollar against the euro reveals some expectation that U.S. stimulus may be ahead of Europe, at least for the time being. The week ahead will be crucial in further clarifying stimulus and relief efforts from both governments and central banks. How can we improve the Chart Advisor? Tell us at chartadvisor@investopedia.com
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Friday, April 24, 2020
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