Hanging On: Stocks Catch Support

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Market Moves

Stocks seemed to find a toehold to keep from sliding off a cliff as the broad market indexes gapped down to start the session but closed higher than they opened. The S&P 500 (SPX), Nasdaq 100 (NDX), Dow Jones Industrial (DJX) and the Russell 2000 (RUT) dropped between 0.5% and 1% on the day, but it was the shape of the trading that should capture the attention of traders and investors. 

The salient question for investors to ponder is whether the current market action represents a brief pause, a dip in an upward price trend, or an early warning of a coming downtrend and economic recession in 2020. While many are predicting the latter, the market is giving subtle signals that the future will more likely play out as the former. 

The chart below details a key point in how the S&P 500, tracked by State Street’s ETF (SPY), showed a subtle indication that investors want to buy stocks at this price. With tariff and trade war fears causing investors to trim back their positions in stocks like Apple Inc. (AAPL), 3M Company (MMM), and Dow Inc. (DOW), the market didn’t demonstrate much follow-through selling.

The markets instead showed higher-than-usual volume for a net-positive day. Additionally, the index didn’t come anywhere near its 40-day moving average before buyers were willing to step in. These indications suggest that investors are, generally speaking, not so scared of putting their money to work in the stock market.

Large-cap performance

Mid-Cap and Small-Cap Stocks Outperform Large Caps

Another subtle indication that the markets may be ready to rebound shortly is that riskier stocks are not being sold off faster than stocks considered to be more solid investments. One could make the case that this is so today because multinational corporations (large companies) have more exposure to trade war issues. However trade war issues that affect large U.S. companies will affect the economy at large and should make investors of all stripes recoil from risk. The charts below show that, for today at least, this isn’t the case.

Both mid-cap stocks, as tracked by State Street’s mid-cap index-tracking ETF (MDY), and small-cap stocks, tracked by iShares Russell 2000 ETF (IWM), didn’t drop as far at the open and rebounded stronger on the day. Note that the entire range of IWM was fully above the previous low prices in the past month. These subtle indications show that risk-friendly investors are currently reacting quickly to opportunity in the markets. Evidence like this is frequently a bullish indication for the larger market.  

Mid-cap performance

Small-cap performance

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Can Investors Glean Insight from Amgen’s Performance?

If investors are willing to embrace the current moment as a market opportunity, rather than a warning signal, then the logical progression for their activity would be to look for stocks that show recent relative strength. Amgen Inc. (AMGN) is among the best performing large-cap stocks over the past three months. A quick look at its chart helps an investor notice that it looks remarkably stronger than the market averages right now.

Given that this stock, like most biotechnology company stocks, is considered a high-risk, high-opportunity investment, it seems uncharacteristic for investors to seek it out in times of market distress. The fact that they are buoying up the stock price right now is a further bit of evidence that the current market environment is one of opportunity rather than risk. 

The Bottom Line

Stocks fell again today but rebounded within the session to close in positive territory compared to the open. Small- and mid-cap indexes outperformed the large-cap indexes as investors tipped their hand in favor of searching for opportunity. Amgen, a biotechnology company, showed relative strength over the past two days, hinting again that investors are desperately seeking opportunity.

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