foxex: V shaped

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, May 28, 2020

1. The V-shaped market bottom that couldn't happen (but did)

2. Where will you go out to eat?

3. One approach to the social media battle

Market Moves

For most of the day it appeared that stocks had shrugged off the profit-taking behavior that characterized the past two days, however in the final hour of the session it returned. Indexes that were up more than one percent closed down for the day. The Nasdaq 100 (NDX) and the S&P 500 index (SPX) closed just slightly lower, while the Dow Jones Industrial Average (DJI) and the Russell 2000 index (RUT) closed down -.5 percent and -2.5 percent respectively.

It is typical for a market that has a V-shaped move (as seen in the chart below of Invesco's Nasdaq 100 index ETF (QQQ), that when the price returns to its former highs, resistance occurs and sellers begin taking profits. For the bull-market in stocks to regain its footing, however, the move will have to continue, and other index ETFs, such as State Street's S&P 500 index ETF (SPY) will have to follow this same pattern. It is surprising to look at this chart considering how many people said (and still say) that a V-shaped recovery just isn't in the cards. It seems that Nasdaq investors don't buy that line.

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Where Will You Go Out to Eat?

In states that have reopened, people are returning to restaurants. Since it is national hamburger day in the U.S. (really, it is), you might consider where you want to eat. Or at least what kind of establishment you'd consider investing in right now. While some think the idea is premature, others are hungry for values.

The chart below compares share prices of State Street's consumer discretionary index ETF (XLY) with the following restaurant stocks, including Chipotle Mexican Grill (CMG), Yum Brands (YUM), Del Taco (TACO), Sysco Systems (SYY), Darden Restaurants (DRI) and Cheesecake Factory (CAKE). It is important to note that the best of these (CMG) is well above the sector as measuring from the February market highs, while the worst of these (CAKE) is struggling to establish an upward trend. Momentum investors will clearly favor the first, while value investors will favor the latter.

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One Approach to the Social Media Battle

With the U.S. presidential election only a few months away, social media advertising will be ground zero for political advertisement spending. Investing opportunity knows no political leanings, and neutral-minded investors might find opportunity in the recent headline-driven spat between U.S. President Trump and Facebook (FB) and Twitter (TWTR).

The chart below provides one way this may be done. The two companies in question are in the top two thirds of the chart (click for a bigger image). The bottom third of the chart displays an indexed price derived by dividing the price of TWTR shares by the price of FB shares. This price index is then overlaid by a 50-day Donchian Channel indicator. When this index crosses the from the bottom to the top half of this indicator, that specifies a time to buy Facebook shares; conversely, when the price drops below the middle, it signifies a time to buy TWTR shares.

Surprisingly, by switching a specific amount of money between these two stocks in binary fashion, an investor would have outperformed both stocks by following this strategy. This is not a recommendation to anyone, but merely an example of how shrewd chart watchers can find opportunities even in everyday news items.

The Bottom Line

Stocks revisited the profit-taking pattern by selling off late in the session. Given that the Nasdaq 100 has completed a V-shaped recovery, it seems statistically likely that the upward trend may eventually continue and find its way higher. If that were to be true, some stocks that might benefit would include restaurant stocks and social media companies. Both of these industries are likely to see increased demand for their services over the summer.