Sparked by a “hotter”-than-expected inflation report on Tuesday, the market had its worst week since June. The numbers were not pretty as the S&P 500 fell 5.15%, the Dow lost 4.13%, and the Nasdaq declined by another 5.5%.
This week traders will finally get some resolution to the long-awaited 75 or 100 bps interest rate hike on Wednesday. Buckle up … again!
Stocks on Watch
Let’s start here: I’ve been pointing out call buying activity in CCJ for weeks. However, the market has not cooperated as the indexes were soft, and then totally fell apart last week. This weakness is what has kept me on the sidelines. Patience, and not adding too much exposure, especially in a bear market, is critical.
That being said, there is no question that there are a handful of stocks that continue to hold up amidst the market weakness. Stocks like UBER, PINS, NFLX and FSLR have hardly given up any ground, despite the selling pressure. I am impressed by all.
The stock from the list above that has also attracted call buying activity is PINS, as last week a trader bought:
Thursday - Buyer of 3,500 Pinterest (PINS) November 27.5 Calls for $2.76 – Stock at 25.5
Friday - Buyer of 5,000 Pinterest (PINS) October 30 Calls for $0.83 – Stock at 25.
Another strong stock that is flirting with a recent high after it reacted well to earnings and attracted call buying last week is Las Vegas Sands (LVS). Here is that trade:
Friday - Buyer of 3,000 Las Vegas Sands (LVS) October 38 Calls for $2.36 – Stock at 38.
I like the way LVS has been trading recently, and the stock is on my radar.
One stock that looks OK (at best), though is often of interest to Cabot Options Trader subscribers, is Apple (AAPL). The stock looks on the verge of a potential breakdown along with its “peers’ META/MSFT/NVDA, yet on Friday a trader bought a large call position looking for a rebound, potentially on earnings:
Friday - Buyer of 10,000 Apple (AAPL) November 155 Calls for $6.60 – Stock at 150.
The price is right for the AAPL calls noted above, though if the market isn’t in the mood, this trade will likely fail.
And finally, while Airbnb (ABNB) has held up fairly well the last two weeks, again, should the market continue to get knocked down, the puts bought on Friday below will probably work very well, as the sellers will turn their attention to stocks with “meat on the bone”:
Friday - Buyer of 1,500 Airbnb (ABNB) November 115 Puts for $8.20 – Stock at 121.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 26.5, or higher by 16.5%. Interestingly, despite the market getting hit hard last week, the VIX never truly spiked higher. Taking that a step further, it would have been easy for the “fear index” to rise dramatically ahead of the Fed event this Wednesday.
Finally, as shared by @sJD10304 on Twitter on Tuesday, “for the first time ever the S&P 500 fell 4% in a single trading day, and the VIX closed that same day under 30.” Where is the fear?!!
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 6
Tuesday – 5
Wednesday – 6
Thursday - 5
Friday – 5.
Events for the Week to Come
There is little question the major event this week is the Federal Reserve announcement on interest rates on Wednesday. As of this weekend, there is a 100% chance of at least a 75-basis point hike, and a 20-30% chance the Central Bank will raise rates by 100 basis points.
What Traders are Saying
There was no lack of negative news and headlines last week … but also maybe some positives under the surface. Here are some of the lowlights first, and then some highlights:
CIO of Bridgewater: The U.S. is the center of the financial bubble most at risk.
CIO of Bridgewater: Recession is likely to be longer than usual.
CIO of Bridgewater: Recession magnitude is likely to be large and difficult.
Nomura: Fed to hike interest rates by 100 bps next week.
Nomura: This intentional “crash-landing” of the economy has seemingly now become the lone path left available for the Federal Reserve in order to kill the “demand side” of their idiosyncratic Inflation disaster. Expect an economic sudden stop similar to March 2020.
Goldman: The U.S. economy is essentially in stagflation, with real activity neither expanding nor contracting, alongside very high inflation.
Goldman: The basic fundamental setup hasn’t changed .. the Fed has a serious inflation problem on their hands and they need to drain liquidity into an economic slowdown ... stocks are still held hostage.
Yikes! Not good. However, on the positive side of the coin …
Despite some calls for the Fed to hike interest rates by 100 bps this week, the bond market is not pricing in a high likelihood of such an aggressive move.
The news seemingly couldn’t be worse, yet the indexes are still trading above their June/July lows.
The VIX at 26 is not screaming panic.
Countless stocks are holding up spectacularly amidst the carnage.
Taking a step back, the news is horrible, there is fear in the air, and we may in fact re-test the lows. However, let’s see this week if the few positives that are percolating under the surface are a sign that the worst may already be priced in.
Open Positions
Long positions: AR, XBI, GOOG, M, OXY, SBUX, XLF
Bearish Positions: SPY
Antero Resources (AR) November 45 Calls – After a couple positive weeks, last week AR fell 6%. Time is absolutely becoming an issue for our calls, and should conditions continue to worsen, because of the time factor, we may be forced to cut this position down in size.
Biotech ETF (XBI) January 84 Call – The XBI lost 5.5% last week, as the ETF continues to ping-pong between 82 and 87 depending on the mood of the market. Big picture, the XBI has been range bound, and because we have profits in the bank I’m willing to give this position some rope.
Alphabet (GOOGL) February 120 Calls – GOOGL fell 7.35% and we may be cutting this position in half very soon. Though of note, on Friday a trader bought 6,000 Google (GOOG) November 107.5 Calls and Sale of November 90 Puts – Stock at 103 (bull risk/reversal).
Macy’s (M) Stock – On Friday the September 20 call that we sold for $1.30 expired worthless, leaving us with only our stock position today. Should the stock rebound, we will sell a new call.
Finally, M stock went ex-dividend last week, and we will receive the $0.1575 per share dividend later this month.
Occidental Petroleum (OXY) December 65/80 Bull Call Spread – OXY was mostly unchanged last week which was very impressive. That being said, oil has certainly weakened recently, which could weigh on OXY.
PayPal (PYPL) March 97.5 Call – PYPL held up really well all last week, “only” declining by 2.3%. I like the way this stock has been trading, though if the market continues to get crushed, PYPL will likely fall as well.
S&P 500 ETF (SPY) March 420/320 Bear Put Spread – For better or worse our SPY bear put spread is at a potential profit of approximately 90%. We will continue to hold this bearish position as a hedge.
Starbucks (SBUX) January 85/110 Bull Call Spread – SBUX was a star last week as the stock rose 3%, largely sparked by the company’s investor day. And while I think SBUX looks terrific, because of market conditions I sold an out-of-the-money call to lower our cost basis just in case the market pulls SBUX down with it.
Of note, option activity was very strong last week, including these trades:
Monday: Buyer of 17,000 Starbucks (SBUX) October 92.5 Calls for $2.32 – Stock at 89.5 (rolled from September calls)
Thursday: Buyer of 87,000 Starbucks (SBUX) December 100/110 Bull Call Spreads for $2.20 – Stock at 93 (rolled out of big December 92.5 call position).
Financials ETF (XLF) January 33 Calls - The financials weren’t the worst last week, though hardly the best either, as the XLF fell 3.8%. Let’s see how the financials, and the market, react to the Fed event on Wednesday.
