This is an excerpt from Cabot Options Trader, your guide to quick profits using puts, calls, spreads, straddles, iron condors and other options trades. Analyst Jacob Mintz explains and recommends diverse investing strategies for big gains with controlled risk.
As traders’ attention shifted away from Greece and China, new headaches emerged, as the commodity collapse and mixed earnings sent the Dow to its worst week since January. For the week, the S&P 500 lost 2.21%, the Dow dropped 2.86% and the Nasdaq fell by 2.33%.
For the bulls, the S&P 500 reached a new intraday high on Monday as global concerns receded and Greece made a debt payment to the IMF and the ECB. The market seemed on the verge of a breakout … only to once again fail. That said, there were several positives this week, as Weekly Jobless Claims came in at their lowest reading since 1973, Existing Home Sales were at their fastest pace in more than eight years and stocks such as Netflix, Google and Amazon exploded higher on earnings.
The bears were once again able to withstand a run at new highs, and then aggressively push the S&P 500, Dow and Russell 2000 below their 50-day moving averages. This was helped by the continued commodity rout that has crushed oil, material and gold stocks. Also, many leading stocks such as Apple, IBM, Microsoft and Caterpillar all reported disappointing earnings.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 13.74, a gain of 15% for the week. This remains a historically depressed level, and if you do not own hedges against your portfolio and are concerned about the market spilling over, the price is right to purchase puts.
On Tuesday, my scanner picked up on a very odd series of trades. In approximately one minute, a trader— or more likely his computer, bought 500 strangles in 20 leading stocks in the September expiration cycle. A strangle is the purchase of out-of-the-money puts and calls, a strategy looking for increased volatility. The stocks in which this trader bought strangles ranged from Wells Fargo to Amgen to Medtronic. This was likely a large hedge fund making a very large bet that volatility is going to increase in coming months; it’s something I will keep my eye on.
Events for the Week to Come
This upcoming week is packed with important economic data including Consumer Confidence, GDP and the Federal Reserve’s announcement on interest rates. Also, companies reporting earnings this week include Pfizer, Gilead Sciences, Twitter and Facebook, to name just a few.
That said, the focus of many traders will likely remain on the aggressive decline in Oil, Materials and the various sectors that are raising red flags for worldwide economic growth.
What Traders are Saying
While the S&P 500 is approximately 2% from all-time highs, I could come up with a list of 100-200 stocks, and charts that would lead you to believe we are in the middle of a major bear market. For example, here are some struggling sectors and large components in these sectors:
• Transports (IYT) are down 12% year-to-date (holdings include Union Pacific (UNP), which is down 23% year-to-date)
• Materials (XME) are down 35% year-to-date (holdings include Freeport-McMoRan (FCX), which is down 47% year-to-date)
• Industrials (XLI) are down 7% year-to-date (holdings include Caterpillar (CAT), which is down 17% year-to-date)
• Oil (USO) is down 21% year-to-date (oil companies include Transocean (RIG), which is down 28% year-to-date)
• Semiconductors (SMH) are down 7% year-to-date (holdings include Intel (INTC), which is down 23% year-to-date)
• Gold (GLD) is down 7.5% year-to-date
• Utilities (XLU) are down 10% year-to-date
• Brazil ETF (EWZ) is down 22% year-to-date
• Copper ETF (JJC) is down 17% year-to-date
On the flipside, there is strength in these sectors and stocks:
• Biotechnology (IBB) is up 25% (holdings include Horizon Pharma (HZNP), which is up 188% year-to-date)
• Social Media (SOCL) is up 10% (holdings include Facebook (FB), which is up 24% year-to-date)
• Cyber Security (HACK) is up 23% (holdings include Palo Alto Networks (PANW), which is up 60% year-to-date)
• Financials (XLF) are up 2% (holdings include JPMorgan (JPM), which is up 10% year-to-date)
Friday was a perfect example of the crosscurrents in the market. As I scanned the S&P 500, it felt like 450 stocks were down 3%-5%, and 50 (the same 50 that have been strong for the past month) were immune to the selloff.
It will be interesting to see is how this plays out in the coming weeks. I would be hard pressed to believe that so many sectors can continue to get hit so hard without taking the current market darlings down with them. Conversely, if the Oils, Transports and other beaten down stocks regain some upside momentum, we could finally see a market breakout to the upside.
Jacob Mintz is Chief Analyst of Cabot Options Trader, and a professional options trader. He has developed a proprietary risk management system for options trades.