foxex: Impending Calm

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, July 17, 2020

1. Volatility falls as indexes trade in tighter ranges

2. Utilities subtle move worth watching

3. Does this price action indicate bullish sentiment?

Market Moves

All asset classes repeated a tight-range price pattern seen yesterday despite the earnings miss from Netflix (NFLX). The S&P 500 index (SPX) rose .28 percent today to close out comparatively quiet trading. This calmer trading environment is prompting equity option market makers to reduce their premium pricing as evidenced by a significant three-day fall in the CBOE Volatility Index (VIX). That this dynamic occurred during a time when the SPX failed to rise proportionally is interesting (see chart below). It implies that investors are in the process of calming down a bit, and that usually is a bullish signal.

Utilities Subtle Move Worth Watching
Chart watchers should always keep one eye on the Utility sector. A good way to do this is to compare State Street's Utility sector index ETF (XLU) with the S&P 500 index. The chart below shows a nascent trend emerging over the past three weeks as utility stocks appear to be edging higher over large cap stocks in general. This action is typically seen as an indication of investor worry because utility stocks have lower volatility and pay dividends. This sector is where professional fund managers stash their money when they worry that the markets may tumble.

With the bulk of the S&P 500 companies reporting earnings over the next three weeks, fund managers can be forgiven if they worry about risk. However, the important thing to notice is that both of these price patterns are moving higher, not lower. So while the move to utilities is prudent right now, it is not indicative of a panic wave—at least not today.

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Does This Price Action Indicate Bullish Sentiment?

In its quarterly report yesterday, Netflix (NFLX) published results that missed analysts estimates, badly, and the company followed that with some guidance that was not so cheery. Given the high prices at which NFLX shares had been trading, the big surprise was not the 15 percent fall after hours but rather the rebound since that moment (see chart below). Investors seemed to focus on the impressive fact that Netflix added more than four million new users last quarter. Only time will tell if this will precipitate a new downward trend, though it seems unlikely, because if investors wanted to bail out of this trade, today would have given them every excuse to do so.

The Bottom Line

Tight range-bound trading continued today, though volatility pricing was noticeably reduced as evidenced by moves on the VIX. Investors are nervous about surprises like Netflix, which missed earnings estimates, and are moving a bit of money into Utility sector stocks.