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Market Moves
The volatility of the stocks in the S&P 500 index increased, even as that benchmark index traded in positive territory for most of the day's session. Furthermore futures traders are betting that the S&P 500 index will continue to show more volatility over the next one to three months. These signals do not bode well for those hoping for the market to resume its formerly bullish trend of the past few months.
Recent actions in the trade war between the U.S. and China, including new tariffs by the Chinese government and President Trump's twitter-based response to them last Friday, have left market participants more concerned about unpredictable twists and turns. This is easy to detect when reviewing the charts of the Volatility Index (VIX) and the ETFs that track its futures contracts based on a 30-day (VXX) and 90-day (VXZ) forward looking expiration (see chart below).
When prices close higher, the VIX usually closes lower. While today's action did not diverge from that norm, the VIX index spent most of the day in positive territory until the final 10 minutes of the trading session, signaling that traders were hedging their bullish bets throughout the day. Additionally, the trend of the 90-day forward contract shows a forecast that volatility will likely continue over the weeks and months ahead.
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Utility Sector on the Rise Over Investor Concern
Over the past three months the portion of the market with the best 90-day return is the utility sector. That's not a bullish signal. In fact, the movement of investor money into the utility sector above all others is consistently associated with investor nervousness and is often coincident with downward moves in the markets.
Stocks in this sector show a fairly wide range of performance so it is useful to know which are showing relative strength. Of the most heavily represented stocks in the sector index, Nextera Energy (NEE), Southern Company (SO), Duke Power (DUK), Consolidated Edison (ED) and Dominion Energy (D) show more than a 12% variance in performance over the last three months. SO and NEE shares are the top performers. If the market continues to show its nervous posture, these two are most likely to continue outperforming the rest of the sector.
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Hewlett Packard Enterprise Weighed Down Ahead of Earnings
The Economist magazine today published a story online that the trade war is already showing an effect on consumer confidence. It is possible that trade war concerns have hit some companies more than others. Consider the example of Hewlett Packard Enterprise division (HPE). This is not the part of HP that makes the popular printers and the high-profit-margin ink. This is the part of the company that does everything else (think cloud services and high-end hardware). The two divisions split off a few years ago and HPE shares have struggled ever since.
Over the past six months, HPE shares and the currency pair that matches the Australian Dollar and the Japanese Yen (ticker symbol AUD/JPY) have shown a remarkable similarity in their price action. For whatever reason, HPE shares appear exposed to the pressures associated with that region. Undoubtedly the trade war is weighing on this currency pair, and, quite possibly, indirectly affecting HPE shares along the way. With the company reporting earnings tomorrow, investors are likely nervous about what the quarterly results will show.
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The Bottom Line
U.S. stocks show an underlying volatility. This signals that nervous investors are hedging their bets. Looking at sector performance they appear to be investing in utility stocks. The volatility is heavily influenced by developments in the trade war between the U.S. and China. Some companies' stocks, such as HPE shares, show a more
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