foxex: Calming Down

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, May 21, 2020

1. Fed expresses concern driving stocks lower

2. Back in positive territory

3. Benefiting from the stay-at-home economy

Market Moves

This afternoon the Federal Reserve hosted a webcast with Chairman Jerome Powell who shared the Fed's outlook on the economy, while Fed Vice Chairman Richard Clarida spoke in a separate webcast. While these online events were taking place, stocks fell in price, though not dramatically lower. Investors appeared to merely be reflecting the caution shared by these officials. The S&P 500 index (SPX) closed .7 percent lower while the Nasdaq 100 (NDX) shaved off 1.1%. Since the indexes were already in negative territory for the day before these events, the reaction was really quite muted--a notable change from the recent past. Could chart watchers infer optimism from the calm response by investors?

The chart below illustrates the effect of lower volatility on the markets. Generally speaking, declining volatility makes for a bullish sentiment among investors. The chart features a combination of State Street's S&P 500 index ETF (SPY) with the CBOE Volatility index (VIX), by dividing the former by the latter. The smoother black line represents a 20-day moving average of each day's lowest prices.

It turns out that this indicator is reasonably good at making a 2-week forecast of the market. When SPY/VIX closes above the 20-day moving average (green arrows), it signifies that the average implied volatility has been shrinking and favors rising prices. When the price closes below the black line (red arrows), it shows that implied volatility is on the rise and stocks are more likely to fall. Of course it doesn't always work out that way (the yellow arrows mark failed signals) and this tool typically has more failed signals in bull markets.

The key point is that the current state of this indicator has recently completed its forecast and remains well above the price. Should it drop lower, it would be a warning signal for the subsequent two weeks. However, it isn't making that warning now, despite the Fed officials' viewpoints shared today.

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Back in Positive Territory

The chart below details four stocks that have made it into positive territory so far this year. No great surprise, they are the FAANG stocks, skipping Amazon (AMZN). Three of them show significant support regions below the current price trend. The surprise is that Alphabet (GOOGL) and Facebook (FB) show key differences. This likely signals the state of success enjoyed by each with regard to capturing the spike in internet traffic over the past two months.

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Benefiting from the Stay-at-Home Economy

Social media companies have typically seen an increase in traffic as a result of the implementation of policies related to the Coronavirus pandemic. Despite a growing debate about COVID-19 censorship on these platforms, it appears that plenty of people prefer to use them anyway. It may be instructive to discern which platform seems to be doing the best right now. Based on the chart below, that would be Facebook (FB), though Alphabet (GOOGL) and Twitter (TWTR) have both made it to positive territory for the year. It is unlikely that the people will stop poring over information online so heavily for several weeks (or perhaps months) to come, so it seems a good bet that these companies represent ongoing opportunity for investors.

The Bottom Line

Stock prices fell today and when Fed officials spoke they fell a little more. But by not very much, which is in contrast to the way things have been over the past several weeks. This is potentially bullish going forward. Among stocks with realistic opportunity for upward price trends, social media companies show continued strength.