foxex: Finding Support

Chart Advisor | Focus on the Price

Friday, September 04, 2020 Headlines

1. Investors buying dampens the risk premium
2. Heavy volume did not generate heavy losses
3. A subtly bullish signal?

[Programming note: We will be off for the Labor Day holiday on Monday, but we will be back with the Chart Advisor on Tuesday. Have a safe and enjoyable weekend.]

Market Moves

It was the way stocks closed lower that made all the difference. Though the S&P 500 index (SPX) closed today .81% lower and the Nasdaq 100 index (NDX) gave back 1.27%, the chart pattern looked quite bullish. At least for now (see chart below).

News from the Nonfarm Payroll report this morning indicated that the number of new jobs created over the past month was on par with expectations at 1.37 million. The surprise was that the unemployment rate fell and the average wage rose, both in dramatic amounts. Analysts extrapolated the notion that the recovery, though slower than hoped, might be of sufficient quality to blunt the degree of defaults from consumers this fall.

This dynamic was able to attract enough buyers to send stocks of their lows and keep SPX above its former high for 2020. The fact that this took place on the second day of selling and in the lower part of the linear regression range suggests that the current trend may still have room to run.

SPONSORED BY STATE STREET SPDR ETFs

How to Use Low-Cost Core ETFs

Do more with your core—for less. An effective core will look different for each investor, but there are 4 principles to core construction everyone should know.

Build a low-cost core >

Heavy Volume Did Not Generate Heavy Losses

Profit-taking action implies that stocks will fluctuate lower, but could quickly rebound as institutional investors rotate their money out of one sector and into another. Panic selling implies something altogether different and forecasts more selling to come. Today's price action would appear to indicate the selling was more about profit-taking than panic. Some evidence for this is shown in the chart below which compares Invesco's Nasdaq 100 index ETF (QQQ) with iShares Russell 2000 (IWM) and Microcap (IWC) index ETFs along with State Street's Midcap Index ETF (MDY).

Notice how the three ETFs have not followed QQQ higher. When QQQ fell to the trend line (and the relative range of the other ETFs), it rebounded quickly. Panic sellers would not have allowed buyers to raise prices up off that level.

Read more:

Is It Time to Sell Tech Stocks?

U.S. Employers Added 1.37 Million Jobs in August

Crude Oil Could Sell Off Into Mid-$20s

A Subtly Bullish Signal?

The third chart today provides even stronger evidence that panic selling has not taken hold. State Street's Financial sector index ETF (XLF) has lagged behind the S&P 500 index ETF (SPY) for most of the year. If investors were ready to panic and sell stocks down to significantly lower levels, this sector would likely lead the way.

Instead this sector closed higher today, with one notable company leading the way. Bank of America (BAC) has as much exposure to consumer debt as any bank in the U.S. but was willing to spend one billion in cash buying back some of their senior notes. The market took that as a sign of confidence and traded BAC shares 3.43% higher today.

The Bottom Line

Stocks rebounded off support today as investors determined the data from the Nonfarm Payroll report gave indications of a quality recovery on the way. The financial sector showed subtle strength with Bank of America leading the charge heading into the three-day weekend.