Weekly Update
September 26, 2022
As central banks around the globe aggressively raised interest rates, the stock market had its second straight awful week of trading. The S&P 500 fell 4.6%, the Dow lost 4%, and the Nasdaq continued its ugly slide, falling another 5.1%.
Stocks on Watch
Coming off another truly awful week of trading, in which nearly every stock chart I look at makes me want to run and hide, I’m unlikely to add to the portfolio until I see some signs of hope. Though of note, there absolutely was large call buying late last week, in many market leaders. However, also of note, these call buyers weren’t looking for a sharp rebound until late in 2022, or until 2023, as seen below:
Buyer of 10,000 Disney (DIS) December 95 Calls for $12.30 – Stock at 102
Buyer of 1,000 Datadog (DDOG) April 100 Calls for $15.15 – Stock at 90
Buyer of 25,000 Meta (META) January 125 Calls for $27.68 – Stock at 143 (rolled from November calls)
Buyer of 8,000 Amazon (AMZN) December 125 Calls for $6.75 – Stock at 117
Buyer of 5,000 Citigroup (C) June 45 Calls for $5.64 – Stock at 45.5 (rolled from January calls)
Buyer of 10,000 Qualcomm (QCOM) December 110 Calls for $17.01 – Stock at 120.5 (rolled from October calls).
I am slightly encouraged by these large premium call purchases, though again, let’s see if the market can have a positive day or two before piling into any bullish trades.
On the bearish side of the coin, the put buying has largely been targeting a short-term move lower, via weekly put buys. However, there has also been bearish activity, looking for much sharper declines in these stocks, as seen below:
Buyer of 1,300 Square (SQ) March 37.5 Puts for $2.78 – Stock at 61.5
Buyer of 20,000 Doordash (DASH) December 30 Puts for $0.85 – Stock at 55.
SQ and DASH have already been decimated in 2022, and the put buyers above are looking for even greater losses.
Finally, even some of the “safe” stocks, like Coca-Cola (KO) and Pepsi (PEP), have started to get hammered as the sellers move their attention to anything with “meat on the bone.” And on Friday a trader bought puts in KO, looking for even greater losses in the months to come, as seen below:
Buyer of 7,500 Coca-Cola (KO) January 55 Puts for $1.77 – Stock at 58.5.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 30, or higher by 14%. Interestingly, and I will go deeper into this in “What Traders are Saying” below, even though the market is testing the 2022 lows, the VIX is well below its previous highs when the indexes cratered earlier this year.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday - 6
Friday – 5
Events for the Week to Come
This week traders will be looking for any stability in stocks, as last week’s sell-off put the indexes within striking distance of the 2022 lows. And on the economic data front, there are plenty of numbers this week that could shape the trajectory of the indexes, led by Consumer Confidence on Tuesday, GDP on Thursday, and for better or worse, a handful of Fed member speeches throughout the week.
What Traders are Saying
This week in “What Traders are Saying” I wanted to dive into the VIX, as well as answer a question from a subscriber, that I thought would be of interest to the larger group.
On Thursday of last week fellow Cabot analyst Mike Cintolo and I had a debate about the VIX. Here are our differing opinions:
Mike’s thought was that the VIX wasn’t showing enough fear for the market to bottom. Essentially, he “wanted” to see the VIX spike to 35/40, which meant that traders had become overly cautious/pessimistic, and at that point perhaps the market would rally.
I disagreed with Mike, as my belief was that the elevated VIX at 28/30, despite the nasty sell-off, was a positive sign for the market, as hedge funds/institutions were concerned, but also not racing to buy puts to protect against a much larger market decline.
Only time will tell as to whether I’m right, or if Mike is correct. But for now, my opinion is the VIX at 30 is concerning, but it’s also not time to hide in the bunkers.
Next up, let’s dive into a question from a Cabot Options Trader subscriber …
“A recession may be in our near future. I have to ask: What’s a basic options trader to do?”
There are many layers to this question and my answer.
Most importantly, my thought is to be patient and don’t force trades. When the signals line up that the market is turning, we will buy, and keep on buying. But for now, stay patient. It’s not time to be a hero.
Second, and I know this is counterintuitive, but a small recession might be just what the market is looking for, as economic softness would force the Federal Reserve to back off the aggressive interest rate hiking cycle. Or as Goldman Sachs wrote late last week ..
“Until the economy enters a clear recession the pressure for tighter financial conditions is unlikely to abate and periods of relief are unlikely to be sustained.”
I know a recession would be painful for many Americans. But there is little doubt in my mind that we are now in a bad economic news is good for the stock market cycle.
Open Positions
Long positions: XBI, GOOG, M, OXY, PYPL, SBUX, XLF
Bearish Positions: SPY
Biotech ETF (XBI) January 84 Call – The XBI continued its fall last week as the “risk-off” narrative continued. We are only holding a third of a position having taken partial profits twice. That being said, even though it’s a small position, should the ETF continue to fall, we will sell.
Alphabet (GOOGL) February 120 Calls – GOOGL “only” fell 4% last week, though that is hardly something to celebrate, as traders have been puking the former FAANG stocks for weeks. We took a loss on half of our position into this decline late last week.
Macy’s (M) Stock – M drifted lower last week, and for now we are waiting for a better opportunity to sell a new call against our stock position.
Occidental Petroleum (OXY) December 65/80 Bull Call Spread – Finally the sellers moved their attention to the oil stocks last week, which was not great for our OXY position. That being said, the stock still looks mostly fine.
PayPal (PYPL) March 97.5 Call – Despite giving up some ground, PYPL held up much better than most stocks last week, and still looks fairly good. This relative strength could be attributed to yet another upgrade as Bank of America added the stock to its “US 1 List”.
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 150%. We will continue to hold this bearish position as a hedge.
Starbucks (SBUX) January 85/110 Bull Call Spread – After weeks of outperformance the sellers finally turned their attention to SBUX late last week. Though like OXY/PYPL above, SBUX still looks fairly solid given the carnage in the rest of the market.
Financials ETF (XLF) January 33 Calls - The XLF looked on solid ground three weeks ago, and now looks terrible again. This position is next on the chopping block unless it shows some signs of life very soon.
