foxex: Hedging Tools

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Friday, September 11, 2020 Headlines

1. Bonds responding better than Gold in wake of stock selling
2. Both the Nasdaq and Russell cross the line
3. Homebuilding industry still attracting buyers

Market Moves

Two hours into today's session, sellers drove stocks lower as the Nasdaq 100 (NDX) and the S&P 500 (SPX) indexes notched losses at the close. In response to this action, investors looking for hedging instruments appeared to favor bonds over gold as the chart below indicates.

The price action for IShares' 20-year Treasury Bond index ETF (TLT) shows that this security has edged out of a falling wedge price pattern. This is usually a bullish signal especially when the price uses the upper boundary as a new support level. Meanwhile, gold prices as tracked by State Street's Gold Trust ETF (GLD) in the lower panel, show that this asset has yet to break upward from its descending triangle pattern.

GLD staying inside its pattern isn't a bearish signal, but the fact that a bullish breakout has not occurred at the same time stock indexes are breaking through their trend lines, is an important observation. It indicates that money is not flowing out of stocks and into gold. This technique is often useful for chart watchers to use when estimating which hedging tools are in greater demand right now.

Both the Nasdaq and Russell Cross the Line

The second chart today (below) is rather troubling for active investors. It creates a very strong indication that, in the short-term at least, prices are likely to show some unpleasant fluctuation and could drift lower. Invesco's Nasdaq 100 index ETF (QQQ) and iShares' Russell 2000 index ETF (IWM) are usually leading indicators of where the broader market will go. For both to be cutting through their trendlines simultaneously signals a growing sentiment of reducing risk in the markets.

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Homebuilding Industry Still Attracting Buyers

The homebuilding industry may provide a bit of hope that any selling in the stock market will be short lived. The chart below displays how State Street's Homebuilder industry index ETF (XHB) has broken through its first trendline, but seems to be holding at its second, more recent trendline.

This is likely a function of interest rates falling slightly. That dynamic is directly connected to bond prices rising since the two are inversely correlated. As bond prices rise, interest rates fall; as interest rates fall, demand for housing increases; as home demand increase, the financial industry maintains its strength and stocks find support. If stocks were to be in serious trouble for a longer time horizon, this industry would be falling no matter what interest rates were doing. But since that hasn't happened yet, the charts give hope that any sell off in stocks may not be too serious or last too long.

The Bottom Line

As the NDX and SPX continue to decline, investors favored Bonds over GLD. Prices are likely to decline, at least for the short term, as indicated by the movement of the Nasdaq and Russell. Both crossed below their respective trendlines. However, homebuying does not seem to be declining as rapidly. This gives hope that any downward movement will be short lived.

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