foxex: Bonds to Stocks

Read in Browser

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, May 04, 2020

1. Money flows from bonds to stocks

2. Investors timidly buying after earnings

3. The software wonder from down under

Market Moves

Stock indexes rose mildly after an opening drop, while bond prices fell slightly on the day. Though both moves were small and unremarkable on their own, the timing of these two outcomes is meaningful. While stocks and bonds moved within a relatively small trading range, the CBOE Volatility Index (VIX) moved disproportionately lower, suggesting that investors were acting with less fear and money is flowing from bond funds to stock funds.

The chart below displays a relative strength study of the price of State Street's S&P 500 index ETF (SPY) with iShares' 20-year Treasury Bond index ETF (TLT). The study is mathematically derived as literally SPY divided by TLT. As it rises SPY is outperforming TLT, but when it falls the bond fund is rising. This is the simplest chart tool available to make a quick-and-dirty estimate of where investor money is flowing, whether towards bonds or towards stocks.

The chart also measures historic volatility between the two funds using four different Keltner Channel measures. These four measures include a duration for averaging and a multiplication factor of the Average True Range (ATR). The chart displays different colors for the 40-day 4-ATR, 30-day 3-ATR, 20-day 2-ATR and 10-day 1-ATR measures (the last in the bright yellow swath).

The chart shows two things are underway: decreasing volatility (as the color ranges begin to compress) and mild upward move (implying fund flows moving from bonds to stocks). Though some may consider this ill-advised behavior, investors seem determined to keep giving stocks a try.

SPONSORED BY STATE STREET SPDR ETFs

Build Your Core with SPDR^® Low-Cost Portfolio ETFs^™

With today's low return expectations, building a low-cost, diversified core may be more important than ever. Matthew Bartolini, CFA, explains our four principles to core construction and different implementation strategies.

SIGN UP >

Investors Timidly Buying After Earnings

The top six stocks in the Nasdaq 100 reported earnings over the previous two weeks. Nearly one-third of the companies in the benchmark S&P 500 index (SPX) will report quarterly earnings this week. However, the top six that reported last week are nearly twice as influential as the combined impact of the companies reporting this week. So what did investors do now that all six companies, Netflix (NFLX), Microsoft (MSFT), Alphabet (GOOG and GOOGL), Facebook (FB), Amazon (AMZN), and Apple (AAPL), have all reported? They started buying those six companies.

The chart below compares all six individually with an equal-weighted portfolio of all six stocks and State Street's S&P 500 index ETF (SPY). The chart shows that all six of these companies outperformed the S&P 500 today in intraday trading. This is an indication that investors will likely be more interested in buying opportunity than in fleeing to safety.

Tyson Foods Shareholders Scramble for the Exits After Weak Quarter

Activision Blizzard Earnings: What to Look For

The Software Wonder from Down Under

The final chart today analyzes both a longer trend and a close up view of Atlassian Corporation (TEAM), an Australian company that makes team-oriented software and content-development tools. During this time of greater online and remote collaboration it stands to reason the company may be doing well.

The chart below provides an example of what active traders are looking for in any stocks trying to come back from their lows. The chart uses the same studies as the SPY/TLT chart mentioned earlier. Four areas marked on the chart below include (1) a new uptrend, (2) collapsing volatility ranges above the price, (3) expanding volatility ranges below the price, and (4) a strong breakout above former resistance. Any of these signals is bullish on their own, but the combination makes a continued trend appear more likely. That investors are actively seeking out such opportunity corroborates the trends from the two previous charts.

The Bottom Line

Stock indexes made mild gains compared to the bond market's mild slide. This dynamic and decreasing volatility seem to indicate that investors are insistent on dipping a toe back in the water. Online software companies like Atlassian are showing continuing strength.