foxex: Mixed Signals

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, June 22, 2020

1. Investors behaving like they were before the pandemic?

2. Precious metals redux

3. Commodity supply factors show differing demand view

Market Moves

If the Nasdaq 100 index (NDX) could talk, it would declare that the pandemic is over—at least from the perspective of the high-tech investor. This makes for a bold declaration considering the sentiment is not in sync with the other benchmarks. The S&P 500 (SPX) and the Dow Jones Industrial Average (DJI) show weak support in comparison to the way the Nasdaq filled its recent gap and closed on a new high.

Chart watchers will also appreciate the importance of the disparity between these indexes and the Russell 2000 (RUT). The chart below shows that the weak close for the small-cap index stands in sharp contrast to the others. Historically this would be a bearish signal for all markets because it shows that investors are not broadly seeking opportunity of any kind. But this brand of risk preference is not new. It shows a fascinating similarity to the way investors displayed their preferences during the better part of 2019—before the COVID-19 outbreak. Does that mean, from a trading perspective, the markets are back to normal? Not so fast. Not all signals are in agreement with that idea.

[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.]

Precious Metals Redux
Comparing the price action on State Street's Gold price index ETF (GLD) with that of iShares Silver Trust ETF (SLV) it seems that the prices are both meeting resistance, but in slightly different ways. Though they both were unable to break the top of their current price channel, GLD shares are doing so on an upward-sloping trendline, while SLV is doing so on a shorter, downward-sloping trendline (see chart below).

The importance of this is that neither metal seems to strongly attract investors right now. This suggests that investors don't appear to be hedging their investments the way they did at the start of the pandemic. However they aren't liquidating their positions in these metals, also implying they still feel a need to maintain a hedge against the value of the U.S. dollar and other currencies.

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Commodity Supply Factors Show Differing Demand View

Oil prices (USOIL) have a strong influence on the price of commodities in general. Invesco's DB Commodity Index Tracking Fund (DBC) is heavily influenced by oil prices. That's why a comparison of that fund and Invesco's DB Agriculture Fund (DBA) becomes a meaningful measure of supply and demand factors in the economy. Right now an interesting pattern has emerged in the comparison of these two funds (see chart below).

DBC shares are trending higher and DBA shares are not. It seems as though this has an easy explanation because oil prices have an organization (OPEC) dedicated to regulating supply issues, where agricultural commodities have no analogous entity attempting to regulate production for them. Thus this chart demonstrates that while investors are acting like demand will return, they are also acknowledging that it won't be enough demand to consume the likely oversupply of agricultural products headed toward the market. Thus all three comparisons today show a mix of optimism and caution. That's a generally bullish posture, but one that can provide a lot of volatility along the way.

The Bottom Line

Investors have gone back to favoring large-cap tech stocks, even while showing a slightly risk averse market sentiment. It will likely take the next few days to reveal whether this sentiment implies that investors are showing a commitment to find opportunity or are merely attempting to remain agile and keep their options open.