May 5, 2023
Stocks on Watch – A Growing List
Despite the market flopping around, and perhaps sagging a bit, earnings season has produced a growing number of stocks I have interest in potentially adding to the portfolio. Here is a look at that list, which I will dive into in greater detail in my Monday morning Stocks on Watch:
Abbott Laboratories (ABT)
D.R. Horton (DHI)
Las Vegas Sands (LVS)
Spotify (SPOT)
Uber (UBER)
Shopify (SHOP)
DraftKings (DKNG)
I like the look of all of these earnings season winners, and could easily add 2-5 of the stocks to the portfolio.
However, what I don’t love is the action under the surface of the market. As I’ve written the past two weeks, the majority of stocks have been falling, the banks look like garbage, the semiconductors look suspect, and commodity-related stocks have fallen off a cliff. That is not a recipe for market gains.
Because of these warning signs, we have largely been on the sidelines the past several weeks as the set-up for new buys has not been right … and this has 100% been the right move.
That being said, should the banking situation chill out a touch, and stocks outside of MSFT/META/AAPL show some signs of life (for more than one day), I could easily see adding some of the earnings winners listed above to the portfolio.
May 2, 2023
Here We Go Again Banks?
Once again, the regional banks, REITs and fintech stocks are under pressure and attracting big put buying.
For example …
Charles Schwab (SCHW) is testing its 2023 low.
U.S. Bancorp (USB), Zion Bancrop. (ZION) and countless others are below their previous 2023 lows.
Smaller regional banks such as PacWest (PACW) are getting killed again today.
On top of that, option activity in this group is bearish yet again, including these trades from this morning:
Buyer of 19,000 Regional Bank ETF (KRE) June 39 Puts for $2.75 – Stock at 38.5
Buyer of 2,500 Regions Financial (RF) June 16 Puts for $0.60 – Stock at 17
Buyer of 3,000 Lending Club (LC) January 5 Puts for $0.55 – Stock at 6.8
Buyer of 3,000 KKR (KKR) September 35 Puts for $0.65 – Stock at 51.5
Buyer of 12,000 Coinbase (COIN) May 40 Puts for $1.70 – Stock at 48.7
Buyer of 5,000 Charles Schwab (SCHW) May 45 Puts for $0.70 – Stock at 49.25
Buyer of PacWest (PACW) puts in all expirations and strikes … 3:1 puts over call activity today
The put buying above is a small sample of this bearish activity in the financial space and is concerning for the sector and the market.
And while this sector weakness and put buying is definitely concerning, I would note that the VIX at 18, ahead of the Fed event tomorrow, is hardly screaming “End of the Financial System and Bank Runs!”
The Fed chairman’s commentary on the banking sector stress at his press conference tomorrow should be interesting.
May 1, 2023
Weekly Update
Led by mega-cap tech stocks, the indexes tacked on modest gains last week. The S&P 500 rose 1%, the Dow added 0.84%, and the Nasdaq gained 0.7%.
This week has the potential to be volatile as earnings season continues and the Federal Reserve interest rate decision on Wednesday afternoon could shake up the market.
Stocks on Watch
While the past couple of weeks haven’t been particularly pleasant as trades in JETS/BABA have failed, I would note that over time the system of following option order flow works, as my record over 10 years at Cabot Options Trader has shown, and as this morning Jacob’s Private Circle members woke up to a buyout. Here are the details:
Two weeks ago a trader bought 15,000 Iveric bio (ISEE) May 30 Calls for $2.08 – Stock at 29. This call buy along with stock strength triggered a recommendation from me of the January 30/40 bull call spread for JPC members.
Then on Friday just before the close of the market, a trader bought 3,500 May 36 Calls for $1.25 – Stock at 32.5. That trade late on a Friday was very suspect.
Fast forward to this morning and ISEE was bought out for $40 a share.
My point in sharing this call buying is while the last couple of weeks haven’t been fun for the Options Trader portfolio, the system works, and I’m confident that I will find an ISEE for Options Trader soon.
Now we just need the market to break out of this brutal range it’s been in for months and for takeovers to ramp up, which will surely bring out the insider trader activity much like in ISEE. When that happens, we will capitalize on it.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 16.5. This low level in the VIX, ahead of another big week of earnings and the Fed announcement on Wednesday, is fairly surprising to me.
Though of note, the market has been maddingly range bound for months, which may help explain the lack of fear in the market and the low VIX.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday - 5
Friday – 5
Events for the Week to Come
The Federal Reserve announcement on Wednesday (80% chance of a 25-basis point hike) and the Fed Chairman’s press conference that follows will be the major event for the week, followed then by the April Jobs Report on Friday.
Also, traders will be focused on a heavy week of earnings releases (25% of the S&P 500 will report this week), led by Apple (AAPL), Advanced Micro Devices (AMD), Shopify (SHOP) and many more:
What Traders are Saying
Once investors get past the Federal Reserve meeting this week and then the heart of earnings season, attention will likely turn to the debt ceiling.
And while I expect a deal will get done at some point before default, traders and investors also expected that to happen in 2011, and I vividly remember the stock market tanking as politicians fought to the bitter end. It was brutal!
Below is research from two Wall Street firms on this topic …
Charles Schwab: The closest the United States has ever come to defaulting was in the summer of 2011. Markets were roiled as uncertainty about when Congress would raise the ceiling continued through the summer. The S&P 500 fell by more than 16% in just over five weeks in July and early August of that year. Standard & Poor’s downgraded the U.S. credit rating for the first time ever. Congress eventually reached a compromise in early August 2011, raising the debt limit just days before the country would have defaulted.
PIMCO: A debt ceiling deal continues to be our base case – with high odds – meaning that while a technical default is possible (as is the case whenever Congress is obligated to increase the country’s debt limit), we think such a catastrophic outcome will be avoided for the very reason that default would be catastrophic, not just for the for the markets and economy, but also politically. Although we are confident that a resolution will occur before the debt ceiling deadline, the timing and the composition remain to be seen. If past is prologue, we believe it will likely happen at the eleventh hour and only after some brinksmanship (as one senior staffer noted: Some members of Congress may have to touch the hot stove before agreeing to a resolution).
Stepping back, as I noted above, I expect a deal will get done. In fact, the VIX is showing very little fear of a default, having closed at 16 on Friday. That being said, our friends in Washington, D.C. could make things interesting!
Open Positions
Long positions: BABA, BAC, CLF, DIS, FTI, IWM
Bearish Positions: SPY
Alibaba (BABA) October 105 Call – BABA, and its China peers fell again last week, and we took a partial loss on our position. This trade flat out hasn’t worked, which is quite disappointing.
Bank of America (BAC) May 32 Covered Call – BAC was mostly unchanged last week, which is fine for our covered call position. Of note, the May 32 call that we sold has lost most of its value and at some point should the stock rally we may roll this call sale again.
Cleveland-Cliffs (CLF) May 17 Covered Call – Last week ahead of earnings we rolled our CLF covered call to the May expiration cycle, lowering our cost basis to 15.91. CLF fell marginally last week on earnings, which is fine for our covered call that we will let decay away in the weeks to come.
Disney (DIS) September 105/130 Bull Call Spread – DIS showed signs of life last week, having tacked on 3% of gains and closing Friday at a multi-week high. The company will report earnings on May 10.
TechnipFMC (FTI) May 14 Covered Call – Last week ahead of earnings we rolled our FTI covered call to the May expiration cycle, lowering our cost basis to 12.59.
FTI reacted well to earnings on Thursday, having gained nearly 5%.
The plan moving forward is to continue to let the option that we sold decay.
Russell 2000 (IWM) August 177 Call – The IWM was mostly unchanged last week. Not much more to add.
S&P 500 ETF (SPY) September 400 Put – We will continue to hold our lone bearish position through this week’s Fed event and Jobs Report.
