foxex: Tricky Bonds

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Wednesday, July 15, 2020

1. Bonds drift lower as stocks continue to rebound

2. Getting a bigger slice of the pie

3. Domino's earnings will hint at what investors are thinking

Market Moves

20-year Treasury Bond prices fell by one-half percent as the S&P 500 index (SPX) closed nearly one percent higher. Investing in bonds seems like a naturally good choice during times of uncertainty and market malaise, yet finding profits in bond funds has been tricky so far in 2020.

The chart below displays the movement of iShares' 20-year Treasury Bond index fund (TLT). If all you knew was that bond funds had increased in value by 24 percent since the beginning of the year, then you'd be quite happy to have put your money there. However, unless an investor started the year by allocating some or all of their money to bonds, then it is highly unlikely that they have achieved that kind of performance. Those who responded any time after March 1st will likely find their money has not grown at all.

The importance of this data is that these conditions might cause investors to respond with opportunity-seeking behavior in the second half of 2020. Of course, investors may simply want to avoid risk and hold bonds through the uncertainty. Even if some investors do feel that way, there is a good chance many others will feel a strong desire to try to capture bigger gains. They will be looking for gains similar to the performance of stock indexes in the second quarter of this year.

If those who feel the desire to take risk outnumber those who feel the desire to hold their bonds, then stocks could end up reaching successive new highs in the weeks and months ahead. The more disappointment investors feel now, the greater the likelihood that panic buying will occur.

Getting a Bigger Slice of the Pie
Tech and Consumer Discretionary sector stocks have performed well coming out of the pandemic lows. However, a closer look at the restaurant industry group shows that the pandemic-influenced patterns of consumer behavior have benefited certain companies at the expense of others.

The chart below compares Invesco's Nasdaq 100 index ETF (QQQ) and State Street's Consumer Discretionary sector index ETF (XLY) with two types of fast-food company stocks: those that deliver dinner, and those that serve hot breakfast. The former is winning a greater market share at the current time. Papa John's Pizza (PZZA), Domino's Pizza (DPZ) and Chipotle Mexican Grill (CMG) are not only outperforming the other group, but also handily beating the index benchmarks. Dunkin Donuts (DNKN), McDonald's (MCD) and Starbucks (SBUX) are notably lagging the other group of stocks.

This dynamic could reverse course if consumers thought the pandemic-driven behaviors were going to change sometime soon. The earliest indication of whether that will be so should come tomorrow morning as Domino's Pizza reports their quarterly earnings. Hint: its not likely.

Chart Patterns Suggest Telecom Stocks Are Headed Higher

Pizza Stocks at All-Time Highs Ahead of Earnings

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Domino's Earnings Will Hint at What Investors Are Thinking

Tomorrow morning when Domino's Pizza executives hold a conference call to discuss their quarterly results, analysts will listen closely for any data that might suggest company officials expect current consumer trends to continue. As the chart below shows, it could have a big impact on the price of DPZ shares over the next three months. The chart shows that during the past 10 years the average quarterly change for the stock has been roughly twenty percent. Option sellers have priced in the expectation of less than a seven and a half percent jump or fall tomorrow at the opening. That leaves plenty of room for the shares to trend up or down in the coming days after tomorrow. If investors like the news, DPZ shares could reach $500 per share before the next quarterly report, otherwise the price could fall below $350.

The Bottom Line

Bonds fell slightly as stocks rose slightly. This is enough to tempt conservative investors to feel anxious about missing out on big gains. Such investors who feel that way might go looking for stocks offering big gains. Any investor considering investing in fast food chains right now should pay close attention to what is said in the earnings call for Domino's Pizza tomorrow morning.