foxex: Still Not Over

Chart Advisor | Focus on the Price

Wednesday, April 01, 2020

1. Stocks fall, bonds and commodities flat

2. A good sign within the price action of oil

3. High yields set to attract investors

Market Moves

Stocks fell four percent lower today under the weight of broad-based selling. The good news came from the fact that oil prices actually rose a bit. Since oil and energy stocks have been hit hard during the COVID-19 pandemic, it is instructive to keep an eye on both the progression of active cases as well as movements in the price of oil.

The chart below shows the progression of active cases in the five countries battling the heaviest outbreaks outside of China (the point of origin): Spain, Italy, Germany, France and the United States. The good news is that a noticeable flattening of the curves for Spain and Italy seems to be underway. The bad news is that France and the U.S. have not shown this pattern. Though it is likely they yet will, the question remains how long it will take and what the economic impact will be between now and then. Meanwhile, the price of oil shows an important change in its patterns.

A Good Sign Within the Price Action of Oil

Oil prices gained slightly and recent price action has showed a good sign: less volatility. The chart below shows four measures, the top panel is the spot price of crude oil futures (CL), the center panels compare the CBOE Volatility Index (VIX) in the red line and the CBOE Oil Volatility Index (OVX) in the blue line, and the bottom panel is the Average True Range (ATR) of the price of oil.

The three measures below are all decreasing from a recent peak. That implies that traders expect the price of oil to stabilize and that before long, it might be on the rise again. Considering that VIX traders are targeting April 24 as the moment when the VIX will be more likely to remain below 40 (a bullish signal), then it isn't hard to imagine that the end of the downtrend in oil could come before that time.

(Note: yesterday's edition of the Chart Advisor stated incorrectly that there was more supply than demand in the oil markets right now. The reverse is true. Thanks to those readers who spotted the need for correction!)

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High Yields Set to Attract Investors

Two companies under extreme pressure from the current circumstances include Carnival Cruise Lines (CCL), and Noble Energy (NBL). Both of these companies have reached a nadir of more than 80% off from their share prices at the beginning of 2020. The thing about these companies is that they actually have had reasonable prospects up until now, and some analysts and investors would argue that they still do.

One analyst increased their price target on NBL shares from $9 to $18 per share, a 100% to 300% increase from current share prices. Carnival Cruise Lines dropped 33 percent of its share price today after the stock was halted in its trading yesterday amidst extreme volatility. The company issued a new round of shares, effectively diluting existing shareholder value. However, the important news is that investors actually did buy the shares, raising money for the company and potentially keeping it in business.

These are risky times for investors buying stocks in either of these companies, but if you are one of those investors who believes the companies will not go bankrupt, you might consider looking at the corporate bonds of these companies. Both companies are issuing 3-to-5 year bonds paying over 9% interest. These bonds are investment grade, but just barely. However, because interest rates are that high, these corporate bonds are trading well below par value right now.

The Bottom Line

Traders sold down stocks today driving some companies significantly lower. Bond prices and gold prices held their ground, while oil prices actually rose. Both the slower pace of growth in active COVID-19 cases and the decreasing volatility in oil prices are hopeful signs that the market may not continue lower for much longer than the current month.