On Monday, the Dow Jones Industrial Average closed lower for the fourth straight day, and the S&P 500 and Nasdaq eeked out gains for the second straight day. Both are up for seven straight weeks. But not everything is awesome — earnings expectations are diminishing, as Mike Wilson of Morgan Stanley downgrades the S&P 500’s earnings-per-share growth from 4.3% to 1%. This comes ahead of an edgy week where we are approaching the China tariff and budget deadlines.
In the options markets today, last week’s downside pressure in the open interest works itself out by having the slight scare that we had. This week, the bull and bear positions are more evenly matched so there is no clear directional bias as of today. On Friday, there were 18.5 million calls to 17.7 million puts. There was no meaningful change at the CBOE, as the single-session equity put/call volume ratio stayed pat at 0.61 and close to the 10-day moving average.
Out of the following three stocks, only one has managed a positive past week. In spite of this, and however you slice it, these are three stocks that should see outperformance in the coming weeks:
Amazon (NASDAQ:AMZN) once again delivered an impressive quarter … but the trader reaction is, once again, a disappointment. Eventually, investors will buy Amazon stock back up. AMZN stock has proven that the short-term jitters work themselves out over time.
On Friday, Amazon had a high options activity, but it was split almost evenly. This is an indication that investors are deciding which way to run. A move is coming but the direction of which has yet to be known. Odds are that if markets are higher then Amazon stock may be brewing another rally.
Meanwhile, it continues to teeter around its earnings stock price levels. The report was decent but investors need time to digest the news. The situation is now even more muddled since we learned about Amazon CEO Jeff Bezos media problems. First with his divorce and more recently his confrontation with the Inquirer of his personal private matters.
For months, social media stocks have somewhat been out of favor. Most of the issues stemmed from last year’s Facebook (NASDAQ:FB) debacle. It counterproductive to blame FB for the problem since the privacy issue would have surfaced anyway. As the world spends more time online, more criminals will migrate their activities to space sooner or later.
Last Friday, Twitter stock options traders were busy. Its volume was 250% that of the average daily rate and there were three calls to every put. Clearly the bullish sentiment is building. And therein lies the opportunity.
Because yet, the TWTR stock trend is still going lower. So high interest in calls could indicate a willingness to snapping out of the TWTR earnings tizzy. Investors could be in the process of changing their minds but gingerly so.
This could be the opportunity to join the upside hope rally before it starts.
Snap Inc (SNAP)
On Friday there was one shining star in the social media space. Snap Inc reported earnings that weren’t all bad, and Wall Street threw a raging bash for the stock. TWTR stock rallied 28% in a few days and the short squeeze was on. On Friday, the options volume was 317%, the daily average. And there were 75% calls to 25% puts, so the appetite continues.
One report doesn’t make a trend. I am very skeptical of SNAP business success this past quarter. My hunch is that the trader reaction is over-exuberant and they have raised the bar too much for another upside surprise. The rip rally was fueled by the shorts covering their positions where buying begets more buying. It will be some time before the same scenario builds back up. If I don’t own the shares I wait it out.
Also technically with this massive spike SNAP stock is back to a prior ledge from which it fell hard last October. Usually, those are resistive and the onus is on the bulls to retake. I’d rather wait it out. Snap’s report being well received is not the same as going forward.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.