Schaeffer's Trading Floor Blog

Small-Cap Weakness: Impending Doom, or Buying Opportunity?

Does weakness in the small-cap IWM signal an impending SPY crash?

by 10/2/2014 8:02 AM
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As I'm sure you're well aware, 2014 has seen a bit of a cratering in small caps, particularly on a relative basis. Here's the iShares Russell 2000 ETF (IWM) versus the SPDR S&P 500 ETF Trust (SPY) so far in 2014:

IWM vs SPY since January 2014

The question is, of course, what this means going forward.

Well, here's a scary thought. We saw a similar pattern back in 2007. Here's how the 2007 IWM vs. SPY chart looked into early October of that year.

IWM vs SPY, January-October 2007

Not identical -- but pretty close. Thirteen and a half months later, SPY bottomed at about half the levels of October 2007.

So, sell everything! This proves that small caps are leading us to oblivion.

... but wait, don't load up on those CBOE Volatility Index (VIX) derivatives just yet. Here's how the same ratio looked in the first nine months of 2011:

IWM vs SPY, January-October 2011

That pattern looks familiar, too. But guess what? If you went long SPY at the end of September 2011 and held for a year, you earned about 30%. And we're up about another 40% in the two years since then. So, maybe small-cap underperformance isn't such a bad sign after all.

Truth is, there's just no way to know. The only point I'd like to re-emphasize is not to draw any conclusions from sample sizes of one or two.

The market looks really awful lately, no matter where you look. And volatility keeps on keeping on, though not really getting to extremes. That's not a great sign, either ... I'd rather see a panic over-reaction to what -- so far -- isn't a big stock sell-off, in percentage terms.

But we can't always get what we want.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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U.S. stocks are significantly lower this afternoon, as Wall Street weighs relatively lackluster economic data and a U.S. Ebola scare. Meanwhile, among the equities in focus are airline issue United Continental Holdings Inc (NYSE:UAL), number cruncher Automatic Data Processing (NASDAQ:ADP), and shoe concern Deckers Outdoor Corp (NYSE:DECK), which have all attracted analyst attention.

  • Growing fears of airborne illness are plaguing the airline sector today, and UAL is no exception, down 2.8% at $45.45. The Ebola concerns have overshadowed a price-target hike to $53 from $49, as well as a "buy" reiteration, from UBS -- though UAL's downward momentum has been contained by its 200-day moving average. From a wider technical perspective, this trendline has helped United Continental Holdings Inc more than double in value since December 2012. Against this backdrop, short-term speculators have shown a distinct preference for calls over puts, per the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.38, which ranks just 3 percentage points from a 52-week low.

  • Following the successful spinoff of its dealer-services platform CDK Global, Inc. (NASDAQ:CDK), ADP was hit with a price-target cut to $72 from $85 at RBC, with the brokerage firm underscoring its "sector perform" rating. Skepticism toward ADP has been prevalent among the brokerage bunch. In fact, 11 analysts covering the shares have offered up a "hold" or "sell" suggestion, versus five "buys" or better. On the charts, Automatic Data Processing has tacked on 13.6% year-over-year; however, today's uninspiring brokerage note has the stock down 1.5% at $71.79.

  • DECK is failing to capitalize on a "buy" initiation at Wunderlich Securities, with the stock off 3.8% at last check to trade at $93.47. What's more, the shares are on pace to close south of their 50-day moving average for the first time since June 13. Longer term, DECK has tacked on nearly 11% in 2014, and hit a two-year high of $99.80 on Sept. 22. Option traders are unconvinced of Deckers Outdoor Corp's sustainability, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, the equity's 10-day put/call volume ratio of 2.77 ranks higher than 96% of similar readings taken in the past year, meaning puts have been bought to open over calls at a near-annual-high clip in recent weeks.

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Stocks On the Move: Angie's List Inc, Delta Air Lines, Inc., and Sarepta Therapeutics Inc

ANGI, DAL, and SRPT are moving sharply in Wednesday's trading

by 10/1/2014 12:12 PM
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As we head into the latter half of today's session, three of the day's most notable market movers are online review firm Angie's List Inc (NASDAQ:ANGI), airline issue Delta Air Lines, Inc. (NYSE:DAL), and rare and infectious disease specialist Sarepta Therapeutics Inc (NASDAQ:SRPT). Here's a quick roundup of how ANGI, DAL, and SRPT are performing on the charts so far.

  • ANGI has surged 23.5% to $7.86, amid reports the company is seeking out strategic alternatives, resulting in an upgrade to "market perform" from "underperform" at Northland Capital. Heading into today's session, though, the stock was staring at a nearly 58% year-to-date deficit, so it's no surprise to see sentiment tilted toward the bearish side. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, Angie's List Inc's 10-day put/call volume ratio of 1.27 ranks in the 79th percentile of its annual range. Simply stated, puts have been bought to open over calls at an accelerated clip in recent weeks.

  • DAL was last seen 3.1% lower at $35.03, as fear surrounding the first confirmed domestic case of Ebola overshadows a price-target hike to $55 from $52 and a "buy" rating from UBS. Today's sector-related slump runs counter to DAL's withstanding technical trajectory, though, with the shares up more than 44% year-over-year. In spite of this, put buyers have been active in the equity's options pits, as evidenced by DAL's 10-day ISE/CBOE/PHLX put/call volume ratio of 0.59, which ranks higher than 80% of similar readings taken in the past year. Given Delta Air Lines, Inc.'s impressive showing on the charts, though, a portion of this activity could be a result of shareholders hedging against unexpected downside.

  • Conversely, SRPT is up 6.2% today, as Ebola drug developers rally in the wake of the first U.S. diagnosis. Additionally, CEO Chris Garabedian told CNBC that Sarepta Therapeutics Inc currently has enough doses of its drug to treat 100 patients. Technically speaking, SRPT has spent most of the past few months churning between $20 and $24, with today's boost bringing the equity to the middle of this range, at $22.42. Should the stock continue to break out, a short-covering rally could help propel it even higher. At present, 33.8% of the security's float is sold short, and would take nearly two weeks to cover, at SRPT's average daily pace of trading.

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Analyst Downgrades: Bed Bath & Beyond Inc., eBay Inc, and Walgreen Company

Analysts downwardly revised their ratings on BBBY, EBAY, and WAG

by 10/1/2014 9:41 AM
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Analysts are weighing in today on home retailer Bed Bath & Beyond Inc. (NASDAQ:BBBY), e-commerce issue eBay Inc (NASDAQ:EBAY), and pharmacy chain Walgreen Company (NYSE:WAG). Here's a quick roundup of today's bearish brokerage notes on BBBY, EBAY, and WAG.

  • Credit Suisse assumed coverage on BBBY with a "neutral" rating. This is fairly typical for the stock, which has received 12 "holds" and two "sell" recommendations from the Street, versus just six "strong buy" endorsements. On the charts, Bed Bath & Beyond Inc. has had a rough go of it, tumbling 18.5% this year to trade at $65.46, and could continue to struggle on any additional bearish brokerage attention that comes down the pike.

  • Despite gapping 7.5% higher yesterday after announcing spinoff plans for PayPal, EBAY is in the Street's bearish crosshairs this morning. The stock received no fewer than four downgrades, as well as a price-target cut to $62 from $65 at Wedbush, which also removed the equity from its "Best Ideas" list. At the same time, however, eBay Inc saw its price target raised at Barclays (to $64 from $54), J.P. Morgan Securities (to $61 from $56), and SunTrust Robinson (to $60 from $58). In the options pits, sentiment has been decisively negative, per the equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.71, which ranks just 14 percentage points from a 12-month peak. Meanwhile, on the charts, EBAY is up just 3.2% year-to-date, and closed Tuesday at $56.63.

  • Finally, WAG saw its price target reduced to $70 from $71 at J.P. Morgan Securities, and to $67 from $69 at Jefferies. However, the firms maintained "overweight" and "buy" ratings, respectively. Pessimism is prevalent in the stock's options pits, per Walgreen Company's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.20, which is higher than 87% of all other readings from the last year. On the fundament front, the health-focused retailer has entered into a new Medicare prescription drug plan with Express Scripts Holding Company (NASDAQ:ESRX), and a partnership with The Western Union Company (NYSE:WU), allowing customers to send or receive money at any WAG or Duane Reade location. On the charts, the stock has added just 3.2% in 2014, and closed at $59.27 yesterday.

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Buzz Stocks: Tekmira Pharmaceuticals Corporation, BioCryst Pharmaceuticals, Inc., and NewLink Genetics Corp

Today's stocks to watch in the news include TKMR, BCRX, and NLNK

by 10/1/2014 8:56 AM
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U.S. stocks are cautiously higher this morning, after news of the first confirmed case of Ebola in the U.S. Poised to capitalize on the headlines is drugmaker Tekmira Pharmaceuticals Corporation (NASDAQ:TKMR), as well as sector peers BioCryst Pharmaceuticals, Inc. (NASDAQ:BCRX) and NewLink Genetics Corp (NASDAQ:NLNK).

  • TKMR is about to make some recent call buyers happy. After settling Tuesday at $21.14, the shares are pointed nearly 27% higher in pre-market action, and should easily take out the $26 level for the first time in more than nine months. Tekmira Pharmaceuticals Corporation -- whose Ebola treatment was just approved for emergency use in the U.S. -- has advanced more than 165% in 2014 alone, and has outperformed the broader S&P 500 Index (SPX) by nearly 98 percentage points during the past three months.

  • BCRX -- which also has an experimental Ebola treatment -- is flirting with a 9% gain ahead of the bell, after landing at $9.78 yesterday. Unlike TKMR, BioCryst Pharmaceuticals, Inc. has been a broad-market laggard, underperforming the SPX by nearly 19 percentage points during the past two months. Today's anticipated rally will likely leave a few recent option buyers in the lurch, too. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.61 stands higher than 73% of all other readings from the past year, pointing to a healthier-than-usual appetite for bearish bets over bullish during the past two weeks.

  • Finally, NLNK -- which is also dabbling with an Ebola vaccine -- is headed 10.6% higher at the open, and could enjoy a short-squeeze situation, should be bears abandon ship. Short interest soared 19.3% during the past two reporting periods, and now accounts for more than 29% of NewLink Genetics Corp's total available float. In fact, at the equity's average pace of trading, it would take nearly a month to buy back all of these bearish bets. NLNK finished at $21.42 on Tuesday.

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