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 CBOE Volatility Index (VIX) and the exchange-traded funds (ETFs) that track its futures contracts based on a 30-day and 90-day forward-looking expiration – the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX MT Futures ETN (VXZ), respectively.

When stock 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. 

Chart showing measures of market volatility

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, Inc. (NEE), The Southern Company (SO), Duke Energy Corporation (DUK), Consolidated Edison, Inc. (ED), and Dominion Energy, Inc. (D) show more than a 12% variance in performance over the past three months. Southern Company and NextEra 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.

Chart showing the performance of major utilities stocks

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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 Company (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 Hewlett Packard Enterprise shares have struggled ever since. 

Over the past six months, Hewlett Packard Enterprise shares and the currency pair that matches the Australian dollar and the Japanese yen (AUD/JPY) have shown a remarkable similarity in their price action. For whatever reason, Hewlett Packard Enterprise shares appear exposed to the pressures associated with that region. Undoubtedly, the trade war is weighing on this currency pair, and quite possibly, it is indirectly affecting Hewlett Packard Enterprise shares along the way. With the company reporting earnings tomorrow, investors are likely nervous about what the quarterly results will show.

Chart showing the share price performance of Hewlett Packard Enterprises Company (HPE)

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 Hewlett Packard Enterprise shares, show a more marked impact from the trade war than others.

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