foxex: New Volatility

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, June 12, 2020

1. Stand off between buyers and sellers adds to volatility

2. The industry to watch

3. Measuring correlated market action

Market Moves

The net change from yesterday to the close today was far less impressive than the range and volatility might have suggested. Though stocks closed higher than yesterday, they closed lower than they opened. The pitched battle between buyers and sellers left a significant trading range for the day, implying that sellers may have the upper hand for a few days next week.

However, as the chart below suggests, there may come a time when conditions are right for opportunistic buyers to step in. This chart compares four indexes that track the number of stocks in the 30-component Dow Jones Industrial Average (DJI) that are trading above their 20-day (DITW), 50-day (DIFI), 100-day (DIOH), and 200-day (DITH) moving averages. Historically any time two or more of these lines cross below the 20 level, it can often lead to well-timed buying opportunities. If markets sell off again next week, some of these indexes could drop into a favorable position on this chart (such as the previous ones indicated by red circles).

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The Industry to Watch

Investors hoping that the recent stock market rally will continue may be interested to watch one particular industry group that can provide a strong indication of economic recovery: the homebuilders. Next week one prominent company in this group, Lennar (LEN), will deliver its earnings report. If the news from this announcement is good, then analysts and professional investors may regain confidence in buying up shares for 2020.

The chart below compares LEN with State Street's Homebuilder ETF (XHB) and Home Depot (HD). Both of these stocks, like the benchmark, are currently falling back a bit, but may rebound over the course of the week if investors catch a whiff of opportunity.

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Measuring Correlated Market Action

Over the past three months, an interesting phenomenon has emerged regarding the price action of Bitcoin (BTCUSD) and its correlation to the S&P 500 index (SPX). By extension, this also means that Bitcoin had become inversely correlated with the CBOE Volatility Index (VIX). The charts below make comparisons to demonstrate how this correlation has appeared.

Both of these charts show that there was no serious amount of correlation during 2019. However, beginning in 2020 the correlation between stocks and bitcoin aligned positively and remained so as a result of the COVID-19 pandemic. The importance of this is to note when such a correlation goes away. If these asset classes remain correlated, it is likely an indication that investors still fear the economic effects of the pandemic. Once that correlation begins to break, it becomes an indication that investor fear has waned and that price action for both assets may return to something more normal.

The Bottom Line

Stocks fluctuated strongly today but closed higher than the day before, leaving chart watchers wondering if a buy-the-dip opportunity might be in store soon. Both the homebuilding industry group and a break of the correlation of bitcoin to the benchmark indexes may provide insight next week.