foxex: Pent Up

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, June 08, 2020

1. Markets rise as investors speculate that demand will return

2. What do Boeing and Exxon Mobil have in common?

3. Car manufacturers rise strongly

Market Moves

For the second trading session in a row the S&P 500 index (SPX) was outdone by the Dow Jones Industrial Average (DJI) and many stocks climbed to new 50-day highs. Signs are abundant that investors are anticipating the release of pent-up consumer demand from now through the end of the year. Consider the following examples.

The chart below compares State Street's Homebuilder industry index ETF (XHB) with the 10-year U.S. Treasury note index (TNX). This ETF has strongly rebounded over the last six weeks as interest rates have plummeted. The inverse move makes sense because lower borrowing rates mean more affordable homes, which translate into better potential for the homebuilding industry. What is not intuitively obvious is the fact that last week, as interest rates rebounded strongly, shares of XHB didn't lose any ground. It is important to understand that in addition to home construction companies, XHB also includes the likes of Home Depot (HD) and Whirlpool (WHR) among its holdings. This continued upward move seems to indicate that investors are acknowledging that these stocks, which will benefit from resurgent consumer demand, remain undervalued from the pandemic's effects.

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What do Boeing and Exxon Mobil Have in Common?

The second example can be found in the chart below. This chart displays how Boeing (BA) and Exxon Mobil (XOM) are positively correlated. This may not be an obvious correlation without the understanding that investors expect consumers to demand air travel and the fuel behind it all at the same time. Current circumstances being what they are this is a logical line of deduction. What remains interesting is how aggressively investors are buying these stocks in the face of such lingering uncertainty.

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Car Manufacturers Rise Strongly

The third example is shown in the chart below. If homebuilding and travel are expected to see a healthy uptick of activity between now and the end of the year, it stands to reason that car-buying shouldn't be too far behind. Indeed, the price action on car manufacturers' shares such as Toyota Motor Corp. (TM), General Motors (GM), Ford (F), and Fiat-Chrysler (FCAU) seems to fit along with this theme.

An interesting subscript is how three of these stocks continued up strongly even as interest rates rose significantly last week. Chart watchers can recognize that such a pervasive effect is unlikely to be coincidental. The implication seems clear that the erstwhile big-three manufacturers make more money on financing than Toyota does.

The Bottom Line

Stock continued to rise, with the 30 stocks in the Dow Jones Industrial Average outpacing the other benchmarks. This is likely explained by the idea that investors are anticipating that manufacturing companies are soon likely to benefit from pent-up consumer demand in the months to come. Investors expect this will impact share prices across a wide swath of industry groups including car manufacturers, homebuilders, travel and energy.