All posts by Michael Comeau
Snap’s Earnings Date Is an Awfully Valuable Piece of Insider Info…
UPDATE: Snap finally announced May 10 as its earnings date. Click here for more info. Snap Inc. (SNAP) (a.k.a. Snapchat) options have been trading for about a week, so let’s take a deep dive to see what the story is. First things first: Snap options are fairly liquid. The spreads on most contracts are pretty reasonable. As with all new issues (especially volatile high-beta tech names), the options are expensive, with implied volatility readings in the 47% – 60% range, depending upon the strikes/expiration. It looks like traders expect earnings to be reported the week of May 19. We know this because that week’s series has the highest implied volatility readings. So do you know what is an EXTREMELY valuable piece of insider info? Snap’s exact first earnings date. Why? Because for the options expiring on the week of earning, implied volatility (and thus option prices) will skyrocket. I’d be shocked if they didn’t go over 100% for the week of earnings. For example, the $20 calls expiring May 19 are going for about $1.95, with implied volatility of 60%. Let’s imagine a hypothetical scenario where Snap says today that earnings would be announced on May 18. If implied volatility went up to 100% from 60%, all things being equal, the price of that $20 call would go up to $3.18! (Number calculated with CBOE’s options pricing calculator. Please note: this only holds true for today, since options prices are heavily impacted by time to expiration and other factors) So keep your eyes peeled for the announcement — there could be money to be made if you are very, very fast. (as in able to place orders in seconds) One thing that really surprises me is that there isn’t an especially large put skew in Snap options. A large put skew means the put options are very expensive compared to the calls. Typically, hot new issues that are heavily shorted (which describes Snap to a T) have very high put skews. This is because when stock is hard to borrow (common with heavily-shorted stocks), demand for puts goes way up because traders are desperate to get in. Now, there is a put skew in Snap options, but it’s just a few percentage points here and there — not nearly as big as what we’ve seen with stocks like TWLO, FIT, and GPRO.
Continue Reading -->T3’s Take 3: The Go-Nowhere Market Is Still Going Nowhere
1) Another Day, Another Yawn I was really hoping that the Fed rate announcement and Dutch elections this week would spur some actual, real-life, lasting volatility. But following Wednesday’s post-Fed power rally, the market went right back into snooze mode. The S&P 500 fell -0.1% to 2378.25, with the Nasdaq flat. The Russell 2000 showed a little relative strength, which was nice to see. We also saw key large-cap tech stocks like Apple (AAPL) and nVidia (NVDA) rally intraday to finish near the highs of the day. Regional banks (KRE), which have been key in the post-election rally, also made a nice move off its morning low. 2) Levels to Watch in SPX This morning, T3 Live Chief Strategic Officer Scott Redler issued analysis of the S&P, saying the following: “Watch 2370-2377. We need to hold above that. Otherwise, more choppy downside can happen.” The S&P actually bottomed today at 2377.74, just missing Scott’s key range that would indicate trouble is ahead. So the bulls remain out of reach of the frustrated bears. 3) Quick Sentiment Update In yesterday’s Weekly Sentiment Update, I pointed out that the ISE Sentiment Index showed a huge surge in call options buying. But call buyers backed off quickly today. The ISE Sentiment Index fell to the low 70’s, indicating that traders went right back to buying up puts in anticipation of downside.. Increased put buying is actually good for the bulls, because it indicates that traders are still somewhat nervous. It’s very rare for traders to be skittish at the top.
Continue Reading -->Weekly Sentiment Update: The Crowd Is Neutral but Options Traders Are Running Wild
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw sentiment fall to neutral territory after two weeks of strong bullishness. (see here and here) So with the Fed out of the way, let’s see if anything’s changed using our 5 primary sentiment indicators: 1) VIX Spread – Bullish The 3-month VIX spread is at +3.01 which indicates that traders are moderately bullish. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 53, down from 66 last week. F&G operates on a 1-100 scale, and 53 is basically neutral. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 31.2% of individual investors are bullish, which is well below the long-term average of 38.5%. Bullish AAII Sentiment has been below the long-term average for 7 of the past 8 weeks. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.61 yesterday with a 3-day moving average is 0.68. This is slightly bearish. 5) ISE Sentiment – Bullish This is where things get really interesting. The ISE Sentiment Index is at an insane 304 this morning. That means 304 calls purchased for every 100 puts. We very rarely see reading this high, even in a hard rally. So there are a ton of post-Fed call buyers. , which is a bullish reading. The 10 day moving average is just 83, but I’ll call this bullish becasue of today’s extraordinary surge. Conclusion Out of 5 sentiment indicators, we have: -2 bullish -2 bearish -1 neutral So we’re still stuck in neutral territory, though the insane call buying indicated by the ISE Sentiment Index implies that traders are extremely optimistic near-term. With stocks creeping lower intraday, we’re about to see if those call buyers marked the top.
Continue Reading -->The Trouble With Crude Oil
The action in crude oil has been hideous as of late, as you can see in this weekly chart: To be fair, it doubled in a year, so some profit-taking may be in order. However, let’s hope it can resume the uptrend, or at least hold the uptrend in the $46-$47 area. The oil rebound off the $26.05 February 2016 low played a huge role in last year’s rebound. There’s been no volatility in 2017 but oil is certainly a candidate for messing up the party. Remember, oil affects a lot more than energy stocks. Many regional banks have large energy loan books, and weak oil means more defaults. There are also an awful lot of high-yield energy bonds that would suffer. And historically, weak high-yield markets means trouble for the broader equities market. For now, the bulls remain in firm control, but oil could inspire the bears to finally step up after getting destroyed in the post-election rally.
Continue Reading -->Q&A: How to Judge an Economic Data Point
Dear Michael, How can you call the jobs report ‘Meh’? NFP came in at +235K and beat the street expectations. How is that meh? -Randy Dear Randy, The 235K headline number was fine, but that’s not the totality of the report. Average hourly earnings grew by just 0.2% vs. the 0.3% consensus, which offset the impact of the headline number beat. Plus, you have the remember that expectations were running very high headed into the report. On Wednesday, the ADP employment number beat by a mile. In addition, bonds have been sinking while the US dollar has been rising, indicating that traders have been anticipating the type of strong economic data that has bolstered the Fed’s case for rate hikes. How to Look at Economic Data Points In isolation, economic data points are completely useless. To properly understand them, you must bring them into context by doing 2 things: Measure them against expectations as set by economists and the market itself. Measure them against expectations as set by the market itself. First, let’s look at expectations as set by economists. News and data providers like Bloomberg and Reuters collect forecasts from various economists to determine a consensus forecast, which is a rough approximation of the market’s expectations. With economic statistics, the consensus forecast is determined by taking a median of the data set. Now, for last Friday’s jobs report, the consensus forecast (the median) was 190K. So 235K was a beat. Had the consensus forecast been 300K, 235K would have been disappointment. However, we must also take the actual market’s behavior, because they also play into expectations. As I stated earlier, bonds were falling headed into the report. This is because a strong report would support the case for more Fed rate hikes, which would push down bonds. But what if bonds rallied ahead of the jobs numbers? That would indicate that traders expected a miss in the jobs number. Admittedly, this is more art than science, and it’s generally only applicable to major economic data points like NFP, GDP, CPI, etc. But by focusing on how economic data is reported relative to expectations, you can get a sense of just how ‘good’ that data actually is. And just so you don’t forget, I’ll say it again: In isolation, economic data points are completely useless. To properly understand them, you must bring them into context by doing 2 things: Measure them against expectations as set by economists and the market itself. Measure them against expectations as set by the market itself.
Continue Reading -->Shorts Gone Wild! How to Avoid Getting Crushed by Stocks Like MBLY
Mobileye (MBLY) is a name I cover in my Morning Note fairly regularly. Today, it’s up $14+ after getting taken over by Intel (INTC). Unfortunately, Citron put out a short report on it a few weeks ago, saying it was going to $35, and I got away from it. However, the MBLY action is teaching us a good lesson about shorting stocks. When a stock is still above the 8/21 day moving averages in the face of a negative report, then it’s showing strength. So even if we’re not getting long the stock, there’s no way we’re shorting it when it’s strong. If the stock action doesn’t confirm bad news, the bad news may not matter.
Continue Reading -->T3’s Take 3: The US Dollar Sinks on a ‘Meh’ Jobs Report
1) A ‘Meh’ Jobs Report This morning, the US Bureau of Labor Statistics said that 235,000 nonfarm payrolls were added in February, beating the 200,000 consensus. The unemployment rate was 4.7%, in-line with expectations. However, average hourly earnings grew by just 0.2%, missing the expected 0.3% reading. That drove profit-taking in the US dollar, which has been moving higher in anticipation of a March rate hike. That said, the headline number was still pretty good, and traders are unwavering in their belief that March is in play. The CME’s FedWatch Tool shows that markets are pricing a 91% probability of a rate increase this month. 2) The Big Yawn Market While I was hoping for some volatility on today’s jobs numbers, we didn’t it. Stocks once again traded in a very tight range, with the S&P 500 trading up 0.3%. The Russell 2000 and S&P 500 also made modest gains. Like the US dollar, bank stocks saw profit-taking on the disappointing hourly earnings number. Meanwhile, rate-sensitive groups like gold miners and utilities caught a bid. The brightest spot of the day was biotech, which rallied nicely in the afternoon on speculation that sector leader Gilead (GILD) is about to announce an acquisition. Plus, President Trump is expected to appoint Scott Gottlieb, a doctor with deep ties to the pharma industries, as FDA commissioner. Presumably, he’d create the friendlier regulatory environment that Trump has promised. 3) Neutrality Last week, various sentiment indicators showed that traders were getting very cocky. This week, the picture is quite mixed. The AAII Sentiment Survey showed that individual investors have become much more cautious, even though the major indices barely moved. Click here to read my full Weekly Sentiment Update.
Continue Reading -->Weekly Sentiment Update: Back to Neutral That Fast?
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw sentiment climb to frothy territory. Now, let’s see if anything’s changed now that we’re seeing some signs of deterioration, most notably the relative weakness in the Russell 2000. 1) VIX Spread – Bullish The 3-month VIX spread is at +3.96, which indicates traders are still not concerned with volatility. This is a bullish reading. 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 66, down from 81 last week. F&G operates on a 1-100 scale, and 66 indicates moderate greed. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 30.0% of individual investors are bullish, which is well below the long-term average of 38.5%. It’s also slightly down from last week, which is a surprise to me. Bullish AAII Sentiment has been below the long-term average for 7 of the past 8 weeks. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.72 yesterday, which is a 2 week high. The 3-day moving average is 0.63. This is basically neutral. 5) ISE Sentiment – Neutral The ISE Sentiment Index is currently at 112 (112 calls for every 100 puts) at yesterday’s close, which is a bullish reading. And the 10-day moving average is 84.1. Even though the 10-day moving average indicates high demand for puts relative to calls, I’ll call this neutral because it’s moved up quite a bit, and for the past year or so, the number seems to be perpetually low. In fact, I may have to boot it from these Weekly Sentiment Updates. Conclusion Out of 5 sentiment indicators, we have 2 bullish, 2 neutral, and 2 bearish. So after two weeks of undeniably bullish readings, traders are back in neutral territory. It’s not exciting… but it’s the truth.
Continue Reading -->Q&A: Is the Russell 2000 Overbought?
Hi Mike, I’m a subscriber and I mostly follow Scott Redler’s Daily Recaps. I just noticed that wrote about sentiment. Anyway, I only trade TNA and TZA (3X Russell 2000 ETF’s). Don’t you think it’s way overbought? -Rolando The Russell 2000 has come 21% since its pre-election lows, so under the most basic rule of the market — what goes up must come down, eventually — it may be overbought. But let’s take a look at a chart of the Russell 2000 ETF (IWM). The Russell is pretty far above its 200 day moving average. However, prior to the last pop off the February lows, the Russell spent 2 months doing nothing. And now, IWM basically riding the 8 & 21 day moving averages and building a new trading range between $138 and $141. So from a big-picture perspective, the Russell may look a bit overbought — but that may not mean that it’s going to drop. It could very well drop into another low-volatility range which will allow it to work off the overbought condition. I’d watch to see if IWM tests the 50 day moving average, and how it behaves from there.
Continue Reading -->Weekly Sentiment Update: Bulls Are on Parade and Froth Is Setting In
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw sentiment climb to undeniably bullish territory. Now, let’s see if anything’s changed following the market’s HUGE bull move off President Trump’s address to Congress. 1) VIX Spread – Bullish The 3-month VIX spread is at +3.88, which indicates traders are still not concerned with volatility. This is a bullish reading. 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 81, up from 75 last week. F&G operates on a 1-100 scale, and 81 is in extreme greed territory. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 37.9% of individual investors are bullish, which is right in-line with the long-term average of 38.5%. It’s also slightly down from last week, which is a surprise to me. This is Neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio is at 0.51, which is near 3-month lows. There is a whiff of panic buying here. The 3-day moving average of 0.62. This indicates higher-than-average bullishness. 5) ISE Sentiment – Neutral The ISE Sentiment Index was 119 (92 calls for every 100 puts) at yesterday’s close, which is a bullish reading. And the 10-day moving average is 84.9. Even though the 10-day moving average indicates higher recent demand for puts, I’ll call this neutral because that moving average has moved up quite a bit, and the 119 reading is the highest we’ve seen since early December. Conclusion Out of 5 sentiment indicators, we have 3 bullish, 2 neutral, and 0 bearish. As I said last week, the ISE Sentiment Index seems to always read bearish no matter what’s going on in the market. So that neutral indicator actually doesn’t count for much. So for 2 weeks in a row, traders seem very bullish. That doesn’t necessarily mean we’ve topped out, but there is some frothiness to the action. I would get really worried if the VIX spread expanded to 5, because that would mean traders are pricing in basically no volatility at all following a 15% run off the pre-election lows. For now, I urge you to remember that market trends often go way longer than may seem reasonable. Many traders try to use sentiment indicators as buy/sell signals, but that is a very dangerous game.
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