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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, June 05, 2020

1. Markets spurred by jobs report

2. Are investors too bullish or just not bearish?

3. Boeing fuels continuing airline industry lift

Market Moves

The surprisingly good news from the NonFarm Payroll report lifted the Nasdaq 100 index (NDX) to all-time highs and brought the benchmark S&P 500 index (SPX) nearly back to break even for the year. Both the Dow Jones Industrial Average (DJI) and the Dow Jones Transportation Index (DTX) rose by more than three percent to punctuate a strong week for U.S. stock indexes.

It is hard to know if the current behavior of the stock market indexes can be reduced to the wisdom of crowds, or investors' animal spirits. Either way, the past three months have been a fascinating study of market psychology as countless individual investors have driven the market higher in the absence of reliable data about the expected outcome of the economy.

The chart below demonstrates the forward-looking nature of the markets as a discounting mechanism. It remains to be seen whether the U.S. economy will recover quickly, but it is hard to dismiss the fact that through the stock market, investors are predicting it will. There are plenty of analysts that say otherwise these days. It makes the current state of the market very interesting and challenging for the individual investor to decipher.

Are Investors Too Bullish or just Not Bearish?
The chart below demonstrates some of the conflict between analysts' perceptions and investor behavior. It is a weekly chart of the CBOE put-call ratio (PCC) over the last 13 years. During that period of time, this index has only closed this low on three other occasions. Two of those were untimely peaks associated with the 2008-2009 financial market market crash. Analysts who reference those times and the current readings may now insist that things are going to end badly as a result.

However, a third such indication occurred near the beginning of the year in 2011. In the two months that followed, the markets lifted higher. Though 2011 had a lot of volatility, no one remembers it as the beginning of a crash. What this index actually indicates is not that a crash is coming, but that investors don't feel the need to buy as many put options as they had previously. A simple thought about the current circumstances suggests why this might be so: things are less uncertain now than they were two months ago. Nevertheless, experienced chart watchers know they'll need to keep an eye on how the indexes respond to the resistance inevitable as the S&P 500 reaches former highs.

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Boeing Fuels Continuing Airline Industry Lift

The chart below tells yet another bullish story. Boeing's (BA) strong move up today added to the anticipation that airlines may be ordering new planes and flying customers sometime soon. These stocks, including Delta Air Lines (DAL), Alaska Airlines (ALK), and American Airlines Group (AAL), have all completed a squishy looking double-bottom pattern, signalling a potential long-lasting reversal.

The reality is that no one knows how quickly or strongly the demand for air travel will recover. But investors are jumping on board with the possibility that such demand will return before long. Chart watchers know they can interpret this as bullish investor sentiment, and that such sentiment is likely to be reflected in other moves as well.

The Bottom Line

Stock market indexes resumed their strong upward trend based on good news from the NonFarm Payroll report. The move was so strong it sent the Nasdaq to new highs, the put-call ratio to new lows, and the airline industry flying higher.