April 13, 2023
Sector on Watch – Regional Banks (KRE)
The Regional Banks (KRE) have been the last place investors have wanted to be the last two months as the KRE has lost approximately 35%. The worries that have sent these bank stocks lower include interest rate exposure, recession, commercial real estate, loss of deposits, and on and on. To be frank, it’s been ugly.
And while I am not going to try to bottom tick the Regional Banks, interestingly, ahead of earnings season that kicks off tomorrow, a trader/traders have been positioning for the group to bounce. Here are those trades:
Buyer of 20,000 Regional Bank ETF (KRE) April 44 Calls for $0.62 – Stock at 42.25
Buyer of 10,000 Regional Bank ETF (KRE) May 46 Calls for $1.04 – Stock at 43
As mentioned above, earnings season gets into gear tomorrow with JPMorgan (JPM), Wells Fargo (WFC) and PNC Financial (PNC) reporting, and next week we will hear from Charles Schwab (SCHW), Goldman Sachs (GS), U.S. Bancorp (USB), Zions Bank (ZION), Fifth Third Bancorp (FITB) and more. And while I can never truly know the reasoning behind call buying, I think it’s safe to assume the call buyers above are targeting a better-than-expected earnings season from the banks listed above.
Finally, as noted above, I am not going to buy the KRE. However, IF I wanted to take a speculative shot of a longer-term turnaround for the sector, I might look at:
Buy of the KRE January 44 Calls (exp. 2024) for $5.25
April 10, 2023
Sector on Watch – Natural Gas
The market, as well as option activity, are painfully slow today ahead of a “big” week of inflation data starting on Wednesday, and the start of earnings season on Friday. However, two stocks from the Natural Gas (UNG) space are attracting call buying activity today that I wanted to bring to your attention. Here are those trades:
Buyer of 8,000 Antero Resources (AR) January 32 Calls for $2.15 – Stock at 24.3
Buyer of 10,000 EQT (EQT) May 35 Calls for $1.68 – Stock at 33.5
Natural gas has been a train wreck the last year as the UNG ETF is down 70%. And not surprisingly, both AR and EQT are lower in the last year as well, though the losses are only 27% and 12.5% respectively.
I am going to keep my eye out for continued bullish option activity in UNG, AR and EQT, as well as peer CHK. When this sector gets going it has the potential to go parabolic to the upside.
April 10, 2023
Weekly Update
The holiday-shortened week was mostly a non-event as the S&P 500, Dow and Nasdaq were mostly mixed. And while the week was quiet, under the surface there was selling pressure in growth stocks and materials that raised some yellow flags.
Stocks on Watch
Having added BABA and CLF in the last two weeks, we have started to ramp up our bullish exposure again. And while I think we have room to add even more stocks, the bearish option activity in the banks/financials, including the trades from last week below, makes me “wary” in the short term:
Buyer of 3,000 Apollo Global Management (APO) September 50 Puts for $2.70 – Stock at 60
Buyer of 1,000 Morgan Stanley (MS) July 85 Puts for $6 – Stock at 84
Buyer of 16,000 U.S. Bancorp (USB) April 33 Puts for $0.85 – Stock at 35
Buyer of 5,000 Regional Bank ETF (KRE) May 40 Puts for $1.85 – Stock at 42
Buyer of 2,500 Deutsche Bank (DB) June 9 Puts for $0.57 – Stock at 10.2
Buyer of 5,000 Charles Schwab (SCHW) June 25 and 5,000 June 22.5 Puts – Stock at 49
Buyer of 10,000 Charles Schwab (SCHW) April 48/40 Bear Put Spread for $1.33 – Stock at 50.5
Buyer of 5,000 Charles Schwab (SCHW) April 50 Puts for $2.55 – Stock at 50.
If I decide to add more bearish exposure, Charles Schwab (SCHW) stock looks like a lead candidate as the stock looks very suspect and the steady bearish option activity leads me to believe SCHW could be a candidate for a put buy. Of note, SCHW will report earnings on April 17, which could also help explain the put buys above.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 18.40, which makes sense in that options traders were aggressively selling option volatility ahead of the long weekend.
Conversely, I am somewhat surprised that the VIX closed at such a low level, as it feels like the banking concerns haven’t yet been cleared up.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Tuesday – 4
Wednesday – 5
Thursday - 6
Events for the Week to Come
This week the focus will be back on inflation data as traders will be laser focused on the Consumer Price Index (CPI) on Wednesday and Producer Price Index (PPI) on Thursday.
Of note, as economic data weakened last week, the odds of a rate hike at the Federal Reserve meeting in early May dropped to 50% and the odds of rate CUTS after that meeting (July and beyond) ramped higher.
Also, this week earnings season kicks off, led by:
Thursday: Delta Airlines (DAL)
Friday: JPMorgan (JPM), PNC Financial (PNC), Wells Fargo (WFC).
What Traders are Saying
The price action of the last several weeks has triggered what has historically been a very bullish set-up, as shared by @RyanDetrick:
“The extremely rare Zweig Breadth Thrust just triggered. It has only happened 14 other times since 1950 and the S&P 500 was higher a year later – every. Single. Time. Up more than 23% on average a year later as well.”
According to Marty Zweig, who is the creator of the Zweig Bread Thrust, a “thrust” indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought.
While I’m all for the market exploding higher in the year to come, and I don’t doubt that math when it comes to the Zweig Breadth Thrust triggering, I do want to note that I’m not exactly convinced that the market has been truly strengthening in a big way. This is what I mean …
The banks look AWFUL (never a good sign).
The IWM (small caps) and MDY (mid-caps) both look suspect.
Oils and Commodities look “meh” at best.
The Transports are stuck in mud.
Growth stocks started to weaken last week.
And while there are warning signs in the market and our portfolio’s exposure is fairly light, should the market get in gear and the Zweig Bread Thrust continue to flash a green light, I expect we will ramp up our bullish exposure very quickly.
Open Positions
Long positions: BABA, BAC, CLF, DIS, FTI, JETS, IWM
Bearish Positions: SPY
Alibaba (BABA) October 105 Call – BABA is the hottest stock in terms of bullish option activity, and it’s not really close. This is encouraging for our position. Here is a small sample of the bullish option activity from last week:
Buyer of 7,000 July 130 Calls for $3.40 – Stock at 102
Buyer of 10,000 September 150/170 Bull Call Spread for $1 – Stock at 99
Buyer of 1,000 October 120 Calls for $7.35 – Stock at 98
Buyer of 2,000 August 120 Calls for $5.35 – Stock at 98.
Bank of America (BAC) April 36 Covered Call – BAC was mostly unchanged last week. At some point, likely soon, I will roll our short April 36 call to a closer strike to the current stock price so that we can collect a greater premium.
Cleveland-Cliffs (CLF) April 17 Covered Call - On Thursday we added the CLF April 17 Covered Call to the portfolio following two large call buys. Our net price is 16.39.
Disney (DIS) September 105/130 Bull Call Spread – DIS gained 2% last week and seems to be shaping up. Of note, two Wall Street analyst notes were released recently insisting there is a chance (though I would think small) that Apple might buy DIS.
TechnipFMC (FTI) April 14 Covered Call – At this point the April 14 calls that we sold for $1.02 are worth $0.20. We will continue to let this position decay away (good).
Jets ETF (JETS) October 20 Call - The JETS ETF was down marginally last week. Not much more to add.
Russell 2000 (IWM) August 177 Call – The IWM lost 1.45% last week as regional banks continue to weigh on the index.
S&P 500 ETF (SPY) September 400 Puts – For now I will continue to hold our SPY hedge against our bullish portfolio, especially as the banking crisis may not be over.
