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Chart Advisor: Optimism vs. Pessimism


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Monday, November 09, 2020 Headlines

1. Enthusiastic investors met by pessimistic traders late in session
2. Ready to fly now?
3. Financial sector is back

Market Moves

Over the weekend the reduced anxiety over election uncertainty fueled an unleashing of pent-up investment demand. Investors drove stock indexes markedly higher on the open, though sellers plowed in to take profits late in the session. This made for a surprisingly large trading range in most index moves. The chart below displays that today’s trading range (exclusive of gaps) was larger than any day in the past two months, and it was dominated by selling action.

This would seem to run counter to a bullish narrative for stocks from now until the end of the year. Consider the following measures. Invesco’s Nasdaq 100 index ETF (QQQ) fell roughly 3 percent from its open and never reached a new high, while the State Street’s S&P 500 index ETF (SPY) did make a new high and fell 2.75 percent from the open. State Street’s Dow Jones Industrial Average ETF (DIA) also fell roughly 2.73% from a new high at the open. This implies that investors were much more optimistic about blue chip stocks than big tech companies. This alignment demonstrates a slight preference for stability stocks as opposed to growth-oriented stocks.

Ready to Fly Now?

If the entire market looked like that, it would give longer term investors cause for concern. However, it does not. The chart below compares State Street’s Energy sector ETF (XLE) and shares of Pfizer (PFE) with Alaska Air Group shares (ALK). When the Airline industry group tends to do well, ALK, with its long flights and higher profitability, tends to lead the rest.

Not only did ALK shares trade at their highest price since June, they held on to the gains made at the opening and closed higher still—nearly 20 percent higher on the day. With Pfizer reporting positive news from COVID-19 vaccine trials and the energy sector attracting new money, investors enthusiastically calculated that ALK shares represented a new value today.

Financial Sector is Back

It wasn’t just the Airline industry that took off today. State Street’s Financial Sector ETF (XLF) opened and closed higher as well. As the chart below shows, the industry ETF closed nearly 8 percent higher, led by industry leader J.P. Morgan Chase (JPM).

With the broad market indexes closing lower than they opened, it seems strange that JPM shares remained bullish until the end of the session, closing the day about 13 percent higher. This activity would seem to indicate that investors are expecting that banks won’t have to write down nearly so many defaults and that the economy will be humming again soon.

The Bottom Line

Stocks opened high but sold off strongly. There were several noted exceptions to this pattern of price movement, including stocks in the energy and financial sectors. The price action in these sectors seems to imply that investors stand ready to take the risks.

Originally Published on November 9, 2020

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