foxex: Energy Ejected

Chart Advisor | Focus on the Price

Tuesday, August 25, 2020 Headlines

1. Bonds move aside for stocks' steady climb
2. Who's winning the election race?
3. When analysts misread a pandemic

Market Moves

Bond prices fell .77% today as money continues to rotate from income investing into growth. The S&P 500 index (SPX) stepped up by one-quarter percent after starting off in negative territory at the open. The Dow Jones Industrial Average (DJI) actually closed slightly lower as the index announced major changes ahead, including removing Exxon Mobil (XOM) and adding Salesforce.com (CRM).

The chart below shows a representation that such changes are in order. The pandemic made things worse, but the increased importance of technology over energy is a trend that has been underway for over a decade. With Apple (AAPL) shares closing above $500 per share and XOM trailing near $40 per share, it begins to make a tremendous difference in the calculation. Because the Dow has always been a price-weighted index, a divergence like the one below creates an inordinate drag on all other components in the index.

[NEW READER SURVEY: We are running another 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, and current economic conditions. We'll share the results, as always, and we thank you for your time and participation.]

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Who's Winning the Election Race?

Political advertising dollars make their biggest impact right now in the final 10 weeks before the U.S. presidential election. Aside from those individuals who win elections, the biggest beneficiaries of this advertising windfall are likely to be social media companies. With that in mind, it seems prudent to ponder which companies seem to be capturing these revenues best at this point in time.

The chart below compares the price pattern of the three biggest players in this space: Facebook (FB), Twitter (TWTR), and Alphabet (GOOG). At least in the minds of investors, there is no question who is gaining the greatest benefit from campaign spending right now. It seems interesting to note that Facebook's algorithms have been roundly criticized in various ways, but if the share price is any measure of the company's success, CEO Zuckerberg seems to have a pretty good handle on how to address what matters most to investors.

Salesforce (CRM) Risky to Buy at Current Levels

Exxon Ejected From Dow in Biggest Shake Up Since 2013

When Analysts Misjudge a Pandemic

The entire dynamic of how the markets reacted to the COVID-19 pandemic will make for an important study in market behavior for decades to come—as well it should. Financial professionals and academics widely subscribe to the basic tenet of the Efficient Market Hypothesis (EMH). It is hard not to chuckle at the moniker when thinking about the path stocks have taken in 2020 so far.

While the concept is actually quite sound, the circumstances of the pandemic demonstrate the limitations of the EMH. The chart below is a nice microcosm of these limitations. Perhaps in hindsight every analyst should have realized that if people are going to be forced into their homes for a long period then they will start spending money at home-improvement stores. And yet as the chart below shows, analysts and investors misjudged this phenomenon by advocating a heavy sell-off in March.

Lowe's Companies (LOW) reported earnings that were 28% higher than analysts had expected. Investors spent the last quarter building the price up about that much. The quarter before featured a forty percent decline but also a rapid rebound that erased the loss. These don't seem like moves made by rational, well-informed investors efficiently allocating their money.

However, proponents of the EMH would point out that nobody knew what to expect, so the market was working with inefficient information. Whether it is the information or the investors that are inefficient, such large fluctuations in price make it apparent for investors and traders alike that opportunity is continually recurring in the markets.

The Bottom Line

Bond prices fell and stocks rose signaling that money continues to rotate from income to growth stocks. Social media companies are worth watching right now, with Facebook positioned best. Lowe's handily beat earnings because pandemic-shut-in people love to spend money on their home improvement projects. Who knew?