foxex: Breaking the Banks

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, June 26, 2020

1. Bonds rally as financial sector leads stocks lower

2. Why are these stocks tanking?

3. Stocks holding their upward trend

Market Moves

Bond prices rose one percent as stock indexes fell two and a half percent. Given the timing of the trades (three days before quarter end), this may simply be profit-taking and portfolio rebalancing on the part of professional fund managers. If that is so, the next two trading days may be mildly lower, but buying should resume soon as the new quarter starts. However, things may not go so easy for stocks. The way the financial sector stocks performed today suggests that the selling may continue into July.

The chart below details the three most influential stocks in the financial sector and compares them to State Street's Financial Sector index fund (XLF). The charts of JP Morgan Chase (JPM), Citigroup (C), and Bank of America (BAC) all have one characteristic in common with XLF. These stocks broke recent support in their price patterns, which suggests they may enter into a downward trend.

While these stocks do not typically lead the markets, the market doesn't usually go up without them. If investors are concerned about continuing fallout from COVID-19 related circumstances, they are clearly concerned about the impact of potential defaults on banks.

[READER SURVEY: We are running a two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery. We'll share the results, as always, and we thank you for your time and participation.]

Why are These Stocks Tanking?
Three stocks, Alphabet (GOOGL), Facebook (FB), and Twitter (TWTR) showed drastic selling today. The selling occurred throughout the session as news broke after the market closed yesterday that Verizon (VZ) would halt its ad purchases on Facebook. However, a particular surge of sales took place on FB and TWTR shares about noon Eastern Time, suggesting that fund managers might have wanted to unload the positions before the end of the day.

Analysts explained that this action might cause a snowball effect and hurt ad sales over the next month or two. However, most analysts have maintained their buy rating on the stock.

The way fund managers work is that they treat a single point of bad news as possibly affecting all companies in an industry group, even if the headline names only one of them. That's because their recommendations are driven by various valuation models. These models routinely include the valuations of competing companies in the calculation of a given company's target price for shares. It is possible that such dynamics may create price inefficiency in the current circumstances since ad revenue during this election season is likely to constantly shift from one source to another in the weeks to come.

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The Stocks Holding an Upward Trend

Though most stocks sold off today, a few held onto their gains. It is worth taking note of which stocks didn't sell off so much to get an idea for why investors are selling. This work can help astute traders better gauge market sentiment.

The chart below shows four stocks that had notably strong price action on a day when the markets were unusually weak. Spotify (SPOT), Match (MTCH), Zoom Communications (ZM), and Clorox (CLX) are all maintaining their strong upward trends. This group of four have the conspicuous common factor of benefiting from the pandemic conditions. That they all remain strong is an indication that investors still fear the possibility of a second wave of COVID-19 infections.

The Bottom Line

Bonds rose and stocks fell today suggesting that investors are moving to safer investments. However the timing suggests it may be concentrated into the last days of the month. Internet ad sales took a hit today, but other internet stocks, such as Spotify and Zoom Commmunications, have done well. The difference aligns with those companies that will benefit from people working to stay safe in the days ahead.