foxex: Future Forecast

Chart Advisor | Focus on the Price

Thursday, August 27, 2020 Headlines

1. Markets hold on to gains, defy Powell
2. Netflix will further permeate your life
3. This season's line up of ETFs

Market Moves

Bonds fell, the dollar rose, and stocks didn't give back yesterday's gains. The S&P 500 (SPX) closed .22% higher after yesterday's breakout rally. It is important for chart watchers to step back and think about what the moves in the indexes are telling them right now. Markets operate as a de facto prediction mechanism because they represent investors' expectations about the future. Consider the story told in the chart below about investor sentiment and the market's reaction to the pandemic.

Investors don't really know the future, but they have to put their money on the line and make their best guess about it. The chance that one individual could accurately predict the future over time is slight, but the collective knowledge of the markets in general has a much better track record. Notice how both option pricing professionals and investors correctly identified that the effects of the COVID-19 pandemic would be contained in a short period of time. Obviously the disease continues to spread and no cure is known, nor is there a consensus about how to stop the spread. But that's not the market's job.

The market tries to identify whether it is safe to invest. As early as March, the CBOE Volatility Index (VIX) peaked and did not rise again, suggesting that the worst of the market's condition would pass in about one to two months. Two weeks later the major indexes, SPX and NDX, both put in higher lows signaling an upward trend. This was tantamount to a prediction that the markets would be safe for investing within the next six months. From our current vantage point we can comprehend that the markets were, in a very general sense, correct.

So what does the current market condition predict if the indexes are breaking out to new highs? Is it predicting an end of the pandemic? Or is it predicting strong growth for the 2021 economy? Some hopeful signs seem to be appearing regarding the pandemic. The numbers of new infections may be flattening, and the mortality rate has been declining since late April, the moment when the VIX predicted the worst should pass. However, the VIX still remains above 20, which says there is still a lot of uncertainty.

[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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Netflix Will Further Permeate Your Life

Predicting the future becomes even less reliable if you move away from macro indexes into individual stocks. Even acknowledging that, what is the market predicting about Netflix (NFLX) when it shows such strong evidence of a new upward trend from yesterday's monster gains? One possibility is that the market is predicting you'll watch a lot more things on Netflix in 2021.

Consider the 5-year chart below and the tracking of two fundamental ratios for NFLX. The P/E ratio (middle panel) and the P/S ratio (bottom panel) both suggest that investors think NFLX is not overpriced. The P/E ratio is as low as it has been in the past five years, but it is still so high that investors are signaling they expect the company to grow significantly in the years ahead.

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This Season's Line Up of ETFs

If growth stocks like Netflix are going to continue their upward march, what choices might ETF investors have for finding segments of growth that offer enough diversity to absorb shock, but not so much as to limit outsized gains. The chart below gives suggestions based on ETFs that are outperforming Invesco's Nasdaq 100 index ETF (QQQ) over the past three months. These include O'Shares' Global Internet Giants ETF (OGIG), iShares' Global Clean Energy ETF (ICLN), ETF Managers Group's Video Game Tech ETF (GAMR), and State Street's SPDR S&P Internet ETF (XWEB).

The Bottom Line

Indexes held their gains today as Bonds continued to fall. Although the indexes are on the uptrend, the VIX is showing that here remains a lot of uncertainty about the coming months and the continued effect COVID-19 may have. Netflix continues to gain yet is not overpriced.