June 26, 2023
Weekly Update
The market’s steady advance came to a halt last week, though given the recent run higher, the losses felt “normal”. For the week the S&P 500 fell 1.4%, the Dow lost 1.67%, and the Nasdaq declined by 1.45%.
Stocks on Watch, Volatility and What Traders are Saying
This week I am combining the Stocks on Watch, Volatility and What Traders are Saying sections, as many of my strongest market signals are sending mixed messages (be prepared for me talking out of both sides of my mouth).
First off, the market looks great, as the S&P 500 is now higher by 20% from its October lows. This is the classic definition of a bull market (though really, 20% is a somewhat arbitrary number). Also, after a narrow advance for most of May/June, more and more stocks began to participate in the rally starting two weeks ago.
However, there are definitely some worrisome signs as well …
First off, the Banks (XLF), and especially the Regional Banks (KRE), have started to weaken again. And with this softening in a traditionally critical component of the market, option activity swung very bearish last week in this sector, including these trades:
Buyer of 2,000 U.S. Bancorp (USB) June 31.5 Puts (exp. 6/30) for $0.55 – Stock at 32.5
Buyer of 3,000 Regional Bank ETF (KRE) September 38/34 Bear Put Spread for $1 – Stock at 40
Buyer of 10,000 Real Estate ETF (IYR) July 82/79 Bear Put Spread for $0.75 – Stock at 83
Buyer of 5,000 Digital Realty Trust (DLR) September 90 Puts for $1.98 – Stock at 105
Buyer of 1,000 Wells Fargo (WFC) July 40 Puts for $0.85 – Stock at 41.
Also, late last week markets in China and Europe seemingly ran into a selling wall and pulled back to close the week (Hang Seng fell 1.7% Friday; the Europe Stock 600 declined by 2.2% on the week).
Yet despite some of those worries, somewhat shockingly to me traders are seemingly not worried about a big market decline as the Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 13.44, having briefly traded with a 12 handle Thursday and Friday, which was a multi-year low. This is very surprising ahead of a Federal Reserve meeting in July that is somewhat up in the air in terms of potential outcomes.
Also, the VIX is headed to a historically strong time of year for the “fear index,” as seen below:
So why has the VIX been so soft in the last month, and again last week, despite the market falling across the globe, weakness in the financials, and one would assume a desire to hedge portfolios after a big market rally?
To be frank, I’m quite surprised by this. However, I can come up with a couple theories …
First off, we are headed to the July 4th holiday, and with the Fourth of July on a Tuesday this year, it’s very likely many traders will turn that weekend into a four-day weekend (or more). And because of that traders don’t want to be owners of long volatility positions that will decay.
Also, for now it appears the economy is not going to run into a brick wall as employment data continues to come in stronger than expected.
And finally, it’s possible that many hedge funds and institutions already own puts, potentially bought in the last several weeks with the VIX trading at 17, 16, 15, 14, and because of this, there isn’t much demand for protection.
That being said, in my opinion, with the VIX at 13, the risk/reward in owning longer-dated puts on the SPY or QQQ is very compelling if one wanted to hedge a portfolio … which is why we own December QQQ puts.
Events for the Week to Come
How the market will react to the upheaval in Russia this past weekend is anyone’s guess. Though in fairness, that situation may have gone from boiling hot to a low simmer.
In terms of economic data this week, traders will be watching:
Consumer Confidence and New Home Sales on Tuesday
First-Quarter GDP on Thursday
Personal Consumption Expenditures (PCE) (inflation data) on Friday.
On the earnings front, it will be another quiet week, though traders will be watching Micron (MU) on Wednesday and Nike (NKE) on Thursday.
Open Positions
Bank of America (BAC) July 31 Covered Call – BAC fell 5% last week as the banks yet again came under pressure. Of note, the July 31 calls that we sold for $0.40 are now worth $0.10 as decay has eaten away at this option (good).
Boston Scientific (BSX) November 55 Call – BSX was mostly unchanged last week, and looks great. Of note, Citi put the stock on positive catalyst watch ahead of Boston Scientific announcing results of its ADVENT IDE trial in the second half of the year.
Cleveland-Cliffs (CLF) July 16 Covered Call – CLF fell 4% last week, though it closed Friday within striking distance of our perfect spot.
DraftKings (DKNG) January 25 Call – Impressively, DKNG gained 2% last week, and of greater interest to me, traders aggressively bought calls all week, including these trades:
Thursday - Buyer of 4,000 July 26 Calls for $1.20 – Stock at 25.6
Wednesday - Buyer of 1,000 August 25 Calls for $2.45 – Stock at 25.
Russell 2000 (IWM) August 177 Call – As the Regional Banks came under pressure along with the overall market, the IWM had a bad week as the ETF fell 3%. Up and down this position swings with the market …
Nasdaq ETF (QQQ) December 370 Puts – Very quickly our QQQ puts are in-the-money, and at a potential profit of approximately 15%. I will continue to hold our lone bearish position just in case last week’s market decline was the start of a deeper slide.
Shopify (SHOP) January 62 Call – SHOP fell 1.5% last week though interestingly rose both Thursday and Friday when the market was weak. Perhaps this is due to a price target hike from Oppenheimer, who raised their target from 70 to 80.
UBER (UBER) December 40 Calls – Uber gained 1% last week, following two upgrades of the stock. Here are those price hikes and some of the reasoning behind the upgrades:
UBER - Target raised to 65 at OpCo, sees potential for S&P 500 inclusion later this year.
UBER - Barclays sees a long-term path to 70 per share based on 15-times $10B in EBITDA.
