CHINESE RETALIATORY TARIFFS SEND GLOBAL STOCKS LOWER AGAIN -- TRADE-SENSITIVE ASSETS LEAD TODAY'S RETREAT WHILE SAFE HAVENS CONTINUE TO GAIN -- ARE DRUG STOCKS THAT DEFENSIVE
STOCK SELLING CONTINUES ... Stock prices fell sharply again today and are continuing the trade-inspired selling that started last week. Retaliatory tariffs announced by China appear to be the main catalyst pushing global stocks lower. As a result, markets with the most exposure to trade tensions and Chinese tariffs are falling the most, while traditional safe havens continue to do better. Most of the same stock sectors that led last week's retreat are doing so again today. They include technology, industrials, and materials. The threat of higher Chinese tariffs is hurting apparel retailers which led cyclicals lower. Chinese stocks are leading the global retreat.
SAFE HAVENS GAIN... While falling bond yields weakened financial stocks, bond priced rose. Investors are favoring the safety of Treasury bonds over investment grade corporates and riskier high yield bonds. Currencywise, safe havens like the Swiss franc and Japanese yen are gaining, while the trade-related Chinese yuan and Australian Dollar are the weakest. Gold and gold miners attracted safe haven money; while copper and its producers fell. Traditional stock safe havens are also holding up better again this week. Especially utilities which were today's strongest sector.
UTILITIES REMAIN FAVORITE SAFE HAVEN... Chart 1 shows the Dow Jones Utilities Average gaining more than 1% today and climbing above its 50-day moving average. It's been trading over its 200-day line since January. That's an example of "absolute" strength. The solid line in Chart 1 is ratio of utilities divided by the S&P 500. That line has been rising all month (while the market has been dropping) and shows "relative" strength. That's what a true safe haven looks like.
HOW DEFENSIVE ARE DRUG STOCKS... Last Friday's message suggested that drug stocks had more defensive qualities within the healthcare sector. Chart 3 in that message plotted a ratio of drug stocks divided by the S&P 500 by mistake. Chart 2 below plots the correct ratio which is the Dow Jones US Pharmaceuticals Index divided by the Health Care SPDR (XLV). That ratio shows drug stocks holding up better than the XLV this year. Which appears to support their role as one of the more defensive groups in that sector. But are they truly defensive? To qualify as a safe haven during periods of market weakness, a stock group has to show both absolute and relative strength. While drug stocks have shown "relative" strength" within their sector (and more recently against the S&P 500), they're still trading below their 200-day average (Chart 3). That shows "absolute" weakness. Investors are usually better off sticking to safe havens that are not only outperforming, but actually rising in price as well. Like utilities.
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Chart 1
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Chart 2
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Chart 3
DOW CLOSES BELOW ITS 200-DAY AVERAGE... Stocks had a bad day today. Chart 4 shows the Dow Industrials losing -617 points (-2.38%) and ending the day below its 200-day moving average for the first time since January. Charts 5 and 6 show the S&P 500 and Nasdaq Composite Indexes bearing down on their red lines. Volume is picking up as prices slide, which isn't a good sign. The Dow Transports and the Russell 2000 Small Cap Index also closed below their 200-day lines.
VOLATILITY RISES... Chart 7 show the CBOE Volatility (VIX) rising by 28% today to close at 20.55. That puts it back over the dangerous threshold at 20 but below last week's intra-day high near 23. A close above that level would be a more dangerous sign.
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Chart 4
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Chart 5
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Chart 6
