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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, May 14, 2020

1. Bonds finish three-day winning streak as rates fall

2. Interest rate drop drives blue chips higher

3. At the intersection of dividends and demand

Market Moves

Bond prices closed higher for the third day in a row as the 10-year Treasury Note index (TNX) sunk back to .62% yield. The impact of this move appears to have attracted investors back to stocks, specifically dividend-paying stocks.

The chart below compares State Street's S&P 500 index ETF (SPY) with TNX, to show that these two instruments have not been moving similarly as of late. Conventional wisdom suggests that in times of market trouble, investors usually seek out the safety of bond funds. Because this should drive bonds higher as stocks move lower, the two assets should then become negatively correlated. This played out as expected during the financial crisis of 2008. However, this time around, things look a bit different. In the chart below, it appears that TNX is the index that looks inversely correlated with the broad market index of stocks.

The reason for this is no great surprise, the Fed is throwing the kitchen sink, bathroom tub and all the neighborhood plumbing at the problem of liquidity right now. This puts pressure on every kind of interest rate with the not-unintended consequence of buoying stock prices. Today's action signals that it appears to be working, at least a little. The actual evidence for this can be better seen in the performance of the Dow Jones Industrial Average (DJI) today.

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Interest Rate Drop Drives Blue Chips Higher

When interest rates no longer become attractive to bond investors, many of them seek an alternative source of yield: dividend paying, blue chip stocks. This helps to explain why DJI outperformed the Nasdaq 100 index (NDX) and the S&P 500 index (SPX).

The chart below compares four dividend-heavy ETFs including State Street's Dow Jones Industrial Average ETF (DIA), iShares' Core High Dividend ETF (HDV), iShares' Select Dividend ETF (DVY), and the Vanguard High Dividend Yield ETF (VYM). All had a good showing today, underscoring the fact that investors are placing at least some of their money in these bond-fund alternatives. While this action still shows nervousness on the part of investors, it shows a sentiment less intense than panic. Considering the circumstances of late, the idea that investors are still not panicking can only be seen as a bullish sentiment for analysts and chart watchers to consider.

Microsoft Beats on Earnings, Stock Pops Above Its Monthly Risky Level

Bulls Back in Charge of Home Depot Stock

At The Intersection of Dividends and Demand

When such dynamics become apparent in the price action of assets, astute chart watchers look for the opportunities that might be presented. For example, does any particular stock come to mind if you think of a Dow component, that pays a good dividend, that has been having a good quarter and has an earnings announcement coming up? If you thought about Home Depot (HD) you probably spend too much time looking at charts and thinking about stocks. (But hey, that's why you read the Chart Advisor reports, right?)

The chart below shows what is happening to a company that both pays a good dividend and sells a product in high demand. If that last comment is confusing to you, then you probably haven't visited a local store that sells hardware or home improvement supplies. These places are full, COVID-19 notwithstanding. The price of HD shares has outpaced the likes of Microsoft (MSFT) since the March low point, and that's no small feat. Investors seem to be anticipating an interesting quarterly report before the market opens on Tuesday.

The Bottom Line

Bonds rose and interest rates dropped significantly over the past three days. Dividend stocks picked up investor interest today putting some stocks and ETFs in the spotlight. With earnings coming up, dividend-paying Home Depot stock seems to have investors anticipating good news.