foxex: Failure to Rebound

Chart Advisor | Focus on the Price

Thursday, September 24, 2020 Headlines

1. The indexes sell off in last half of session
2. Defensive stocks show first signs of strength
3. What if the fourth quarter fails to rebound?

Market Moves

In the last thirty minutes of trading today, some investors decided to do a little bargain shopping. The move created a bit of support, but it couldn't overcome the strong selling that took place over the previous two hours. That selling erased the better part of the gains in the trading session to that point. This kind of see-saw price action hints that the market sentiment remains uncertain and is more likely to tilt to pessimism in the days to come.

The chart below displays a snapshot of each of the major index ETFs including Invesco's Nasdaq 100 ETF (QQQ), State Street's S&P 500 ETF (SPY) and the Dow Jones Industrial Average (DJI). Notice how the price action of the last two candles would have resembled something called a Piercing pattern, which is often a bullish indication. However, because of the selling late into the session, today's candle failed to close at or above the halfway point of yesterday's candle, even though prices reached that point intraday. This seems to indicate that institutional investors are not ready to do significant buying just yet.

Defensive Stocks Show First Signs of Strength

The real question chart watchers want to contemplate right now is whether we will see any signs that the uncertainty investors feel will turn into downright pessimism. Such sentiment would mean they would be less inclined to merely hold their positions, but to actively begin selling away their positions instead. This would send stock prices lower not only next week but well into the fourth quarter.

Today's action in State Street's Utility sector (XLU) and Consumer Staples sector (XLP) ETFs seem to provide the first indication that this action may soon begin. As the chart below shows, the indications are subtle and may not yet play out. However, when these sectors show relative strength to others in times of uncertainty, it is a strong indication that institutional investors are moving towards stocks considered to be safe havens. The so-called defensive sectors often provide this kind of tell just before a big change in the markets such as the end-of-quarter period which looms next week.

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What If the Fourth Quarter Fails to Rebound?

If stocks are about to fall further, then investors might want to consider moves such as moving money into cash or bonds. However, institutional investors often need to keep their money invested in stocks when the characteristics of their fund constrains them to do so. Under such circumstances, the stock in the chart below will surely rise in its ranking among institutional investors.

Walmart (WMT) shares come with a dividend that pays out four times a year for a yield of just under two percent. It's not a lot, but most investors see it as being better than a negative number. Perhaps that is why the stock is outperforming the Nasdaq 100 by about 5% in September so far.

The Bottom Line

Investors remain uncertain as stocks show a lot of back-and-forth activity between buyers and sellers. The first indication that this uncertainty might turn into selling showed up today as defensive stocks outperformed all other sectors.

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