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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Wednesday, August 12, 2020 Headlines

1. Stocks recover yesterday's losses and then some

2. Where are investors spending their free cash?

3. Which stock in the Consumer Staples sector will lead?

Market Moves

Stocks rocketed higher today with the S&P 500 index (SPX) closing 1.4% higher and the Nasdaq 100 (NDX) closing 2.6% higher. When you consider where the money came from, this result isn't so surprising. Over the past few days, investors have pulled money from other asset classes, taking profits from bonds, commodities and emerging markets. Based on today's action, such moves seem to have been intended to free up capital for opportunities in stocks.

The chart below shows the assets that had a conspicuous decline over the past few days or weeks. This comparison of iShares' 20-year Treasury index fund ETF (TLT), State Street's Gold Trust ETF (GLD), and iShares' China Large-Cap ETF (FXI), shows how much the price declined when adjusted for volatility. The moves are quite comparable if you adjust the values to be multiples of the Average True Range (ATR). Considering the assets in question, such moves represent a tremendous amount of capital being made available for purchasing stock shares--a very bullish indication.

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Where are Investors Spending their Free Cash?

While Tesla (TSLA) grabbed headlines today with their announcement of a stock split, two other sectors showed strong gains with much less fanfare. These are likely to be continuing sources for unheralded gains in the weeks ahead.

The chart below compares State Street's sector index ETFs, for Consumer Staples (XLP), and Healthcare (XLV), with its ETF for Technology (XLK). When these are compared using the metric previously mentioned (to adjust for historic volatility), the Consumer Staples industry surprisingly shows as the best reward-for-risk sector today.

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Which Stock in the Consumer Staples Sector Will Lead?

If the stocks in the Consumer Staples sector are likely to fare well in the days ahead, which stocks within that sector might benefit? The answer to that question is likely to be the stocks that have the most influence over the sector index: McDonald's (MCD) ad Walmart (WMT).

The chart below compares these two charts and shows their statistical price volatility (yellow-shaded region). One item that stands out is the way the price action on each of these stocks has performed relative to the starting price printed just after the first quarter earnings call. WMT shares have returned to, and held, that price. In contrast, MCD shares have trended higher since that company's earnings report in May. With earnings coming up for Walmart, it is possible that the company may experience a one-time jump to new highs. However, based on a read of this chart, MCD shares appear more likely to trend better over the weeks and months ahead.

The Bottom Line

Stocks staged a very strong rebound today after sharply selling down yesterday. A careful look reveals that money has been coming out of other asset classes in preparation for this. Technology benefited, certainly, but so did stocks in the Consumer Staples and Healthcare sectors. The two heavyweights in the Consumer Staples sector include McDonalds and Walmart. Both are worth watching going forward.