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Chart Advisor: Hedging Hint


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Wednesday, February 17, 2021

1/ Assets reveal investor preferences, stocks trim away risk 

2/ Homebuilding industry trends higher 

3/ Home Depot, Lowe’s lift ahead of earnings 

4/ The bottom line

1/ Assets reveal investor preferences, stocks trim away risk 

Major market indexes opened lower today, and spent most of the session slowly gaining ground back as opportunistic buyers stepped in. The S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJI) both fared better than the Nasdaq 100 Index (NDX) and the Russell 2000 Index (RUT), suggesting that investors today were looking to move towards slightly safer assets. On such a day it becomes useful to understand what kinds of assets investors prefer when they decide to make more defensive moves. The chart below provides some clues. 

If investors think stock market prices are likely to fall, or at least underperform expectations, then they go looking for alternative investments. Tracking price action to look for what assets are the most attractive hedging instruments can be as simple as comparing a variety of assets on a day like today.  

That’s why this chart features four assets often thought of as defensive investments including Gold Futures (GC), Utility Sector stocks as tracked by State Street’s Utility Sector Index ETF (XLU), the U.S. Dollar Index (DXY), and U.S. Treasury Bond Futures (ZB). Each of these instruments represent a potential fund a regular investor might have as a selection for their retirement portfolio. 

Gold futures are a good stand-in for commodity ETFs and mutual funds. Bond futures are a good proxy for income funds. Utility stocks are a good tracking mechanism for growth and income funds. Last of all, the U.S. Dollar index is an excellent way to track what to expect from a money market fund. The latter turns out to be the winner today. 

What is important about this comparison is that it tells chart watchers what the current state of mind is for the retail investor. It answers a question that goes like this, “where will investors choose to put their money when times get tough and stock prices fall drastically.” Right now, it appears that cash is king.     

The stock market is not likely to collapse in the immediate future. How could anyone tell? The chart below has some important clues. The Homebuilder Industry represents the beating heart that drives the most robust part of the economic engine in the U.S. and, by extension, the critical mass of operations in the world’s banking activity.  

The chart below tracks State Street’s Homebuilder Industry ETF (XHB) with six of its top components. The chart shows most of these trending higher, but the top and bottom performers are both trending strongly higher today.

3/ Home Depot, Lowe’s Lift Ahead of Earnings 

Before the market opens on Tuesday next week, Home Depot (HD), and Lowe’s Home Improvement Stores (LOW) will publish their quarterly earnings reports. This will likely be influential to the markets because the health of these companies is an indicator of consumer demand and confidence. Right now, investors are expecting good news from earnings. This is not only a positive indicator for these companies, but for the market at large. The Chart Advisor newsletter will revisit this chart after earnings are released next week. 

4/ The Bottom Line 

Stocks dropped at the open but gained ground through the session. Even so, cash looks like the preferred hedge for any kind of correction that might be ahead. The Homebuilder industry still looks strong so the market and economy are not likely headed for a crash that anyone can anticipate right now. 

Originally Published on February 17, 2021

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