August 21, 2023
Weekly Update
It was another rough week for the bulls as the bond market and China worries continue to weigh on the indexes. By week’s end the S&P 500 and Dow had both lost 2.22%, while the Nasdaq declined by 2.6%.
This week could be interesting as the long-awaited Fed Chairman speech at Jackson Hole could potentially set the stage for more market volatility.
Stocks on Watch
As the market has come under pressure, we have done very little buying the last three weeks. That has been the right move as we have gone from a rolling bull market to some version of a rolling bear market (I’m not calling it a bear market, but the sellers have certainly moved from one sector to the next).
That being said, I continue to freshen up my watch list should market conditions improve. Here are some of those stocks that I’m watching …
I like the way Yeti (YETI) and TJX Companies (TJX) responded to earnings last week as both surged higher following the release of quarterly results, and didn’t give back any of those gains even as the market was under pressure.
In terms of bullish option activity, as has been the case for weeks, I continue to “flirt” with the idea of buying Cameco (CCJ) as the stock has held up and option activity remains bullish, including this trade from Friday:
Friday - Buyer of 20,000 Cameco (CCJ) September 38 Calls for $0.34 – Stock at 34.5.
My concern with buying CCJ is should the sellers really move their attention to stocks that have held up, stocks like CCJ could get hit hard.
Next up is ImmunoGen (IMGN) which is a biotech play that is higher by 215% on the year, though it has given back some of those gains as the biotech sector has weakened. And while the stock has pulled back some, big picture it looks good, and last week a trader bought these two sets of calls:
Thursday - Buyer of 1,000 ImmunoGen (IMGN) September 16 Calls for $1.20 – Stock at 16
Wednesday - Buyer of 1,000 ImmunoGen (IMGN) September 16 Calls for $1 – Stock at 15.75.
Finally, the financials have come under pressure in the last week and could be due for another steep decline should the market truly unwind. And we started to see some bearish option activity in Capital One (COF) last week, including these trades:
Tuesday - Buyer of 7,000 Capital One (COF) September 110 Puts for $5.40 – Stock at 106.5
Wednesday - Buyer of 1,000 Capital One (COF) November 105 Puts for $6.70 – Stock at 105.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 17.30, which continues to hardly scream panic given the moves in the bond market and growing China worries, and ahead of the Jackson Hole Economic Symposium/Fed Chair speech. This lack of an explosive move higher is somewhat encouraging.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 6
Tuesday – 4
Wednesday – 5
Thursday - 5
Friday – 5
Events for the Week to Come
The big event of the week will be the much-anticipated speech from Federal Reserve Chairman Jerome Powell Friday morning. Buckle up for this event as historically the Fed Chair’s speech at this event has laid out the framework for the central bank’s expected future moves, which can in turn send the market into a “tizzy.”
On the earnings front, Nvidia (NVDA) on Wednesday is the big release of the week. This should be interesting as the stock set off the AI explosion last quarter.
What Traders are Saying
Last week the financial press broke out into a furor when Michael Burry, who is well known for having made a fortune betting against the housing sector during the Great Financial Crisis, and was a main character in the movie “The Big Short”, reported a large bearish put position betting against the market. Here is one of those headlines …
One article went on to say Burry and his Scion Asset Management Fund bought puts with a value of $886 million against the SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500. Scion also bought put options totaling $739 million against the Invesco QQQ Trust ETF (QQQ) that tracks the Nasdaq 100. The $1.6 billion Scion spent betting against the market represents 93% of the fund’s entire portfolio.
And while the headlines were scary for many, as Burry has the monster home run betting against housing in his back pocket, there are a couple items that I wanted to address regarding these headlines.
First off, Burry is a known market bear, and he has predicted MANY market falls that have proven to be incorrect.
Secondly, and why I bring this subject up, is the headlines are VERY, VERY misleading.
First, here is a look at Burry’s 13F report:
However …
The calculated portfolio weighting and market value for options above is misleading because derivatives reported in 13Fs are reported in nominal value terms. And the nominal value is calculated as “the number of option contracts” × 100 × “the value of the underlying security.”
With that in mind, and with Burry reporting 2 million shares worth of puts, we can assume he owns 20,000 puts on the SPY and QQQ.
However, the market value above is based on those 20,000 puts and the strike price he bought them on, NOT the price he paid for those puts.
For example, for all we know he bought 40,000 weekly SPY puts and QQQ puts for $0.05, which would give him $1.6 billion NOMINAL short value, but would only COST him $200,000 (not likely, but this an example)
Or he could have bought November far out-of-the-money puts, or January at-the-money puts, or …
My point is we have no clue what puts Burry owns, or what he actually paid for them … though I’m VERY confident he didn’t buy $1.6 billion worth of puts.
And finally, below is a tongue-in-cheek meme that floated through the options trading community regarding this misreported story by most press outlets:
Open Positions
Cleveland-Cliffs (CLF) September 16 Covered Call – On Friday we rolled our covered call position to the September 16 call via a sale for $0.37. This position continues to work well, though a rally back to the 16 level or above would be helpful.
DraftKings (DKNG) January 25 Call – DKNG is a tough one. On the one hand, we are only holding a third of a position having taken partial profits twice already, which means we could give this position more time. On the other hand, the stock didn’t look great for the second straight week.
Freeport McMoRan (FCX) January 44 Calls – FCX is a bit of a problem as this is our lone bullish position that we haven’t taken partial profits on. Though of note, option activity remains strong, including these trades from last week:
Monday - Buyer of 11,000 Freeport McMoRan (FCX) September 42 Calls for $1.36 – Stock at 41
Monday - Buyer of 4,500 Freeport McMoRan (FCX) November 45 Calls for $1.93 – Stock at 41.
Intel (INTC) January 34 Call – INTC finally succumbed to the market pressure Tuesday of last week, and the stock decline wasn’t fun as the semiconductor lost 6% on the week. Of note, option activity remains strong, including this trade from last week:
Monday - Buyer of 6,500 Intel (INTC) September 36 Calls for $1.24 – Stock at 35.6.
Ionq (IONQ) September 15 Covered Call – On Tuesday of last week we added IONQ to the portfolio via the September 15 covered Call, with a breakeven of 13.43. The stock fell following our buy, however, I’m not too concerned about short-term movement with this trade.
Nasdaq ETF (QQQ) December 370 Puts – For better or worse our QQQ puts are back in great shape as the growth index continues to come under pressure. We will hold this position against our bullish positions.
Shopify (SHOP) January 62 Call – SHOP is our worst looking stock as the hyper-growth play looked weak heading into the week, and then broke down further Thursday and Friday. This position is testing my patience.
UBER (UBER) December 40 Calls – UBER mostly held its ground last week and looks pretty good compared to its growth peers. Of note, early last week Loop Capital upgraded the stock, and raised their price target on the shares to 58 from 48 seeing upside to its advertising business.
Energy ETF (XLE) January 85 Calls – The XLE continues to look great as the energy play hardly gave up any ground last week. My only “fear” with this position is will the sellers move their attention to stocks that have held up the last month.
