Schaeffer's Trading Floor Blog

Oil Bears: Smart Money, or Contrarian Signal?

What heavy put volume on the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) means for contrarians

by 10/31/2014 8:53 AM
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Even though the market has recovered most of its gains, oil really has not. The rolling crude near-ish future (now December) peaked at $107.68 in late June, and then dropped to just under $80 by mid-October. It bottomed at $79.44 on Monday, and is still hovering near $80.

And, all that punk action has of course transferred into stocks in the industry, and lately has sparked a flood of put trading. This, via Bloomberg:

Even after valuations for an index tracking the shares slumped 40 percent, investors are loading up on bearish options. The cost of puts on the SPDR S&P Oil & Gas Exploration & Production ETF jumped to the the [sic] highest level in seven years versus calls. The exchange-traded fund tracks companies including Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, which are down more than 9 percent from their highs this year.

… Companies in the index that the oil ETF (XOP) tracks trade at 26.6 times reported earnings, data compiled by Bloomberg show. Multiples fell as much as 39 percent from June to a one-year low on Oct. 14. The benchmark Standard & Poor's 500 Index has a valuation of 17.6 times.

Both volume and the number of options outstanding on the oil ETF surged this month, and nine out of the 10 most-owned contracts are bearish. Those hedging against a 10 percent decline in the fund cost 10.7 points more than calls betting on a 10 percent gain on Oct. 28, according to three-month implied-volatility data compiled by Bloomberg. That's the widest spread since September 2007.

On the surface, it sounds bullish, from a contrarian basis. It's an old saying that you want to get greedy when others are fearful, and there sure is plenty of fear around.

Implied volatility in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) did make quite the move, as well. The XOP "VIX" was as low as 21 in late August, then peaked as high as 58 in mid-October. Then again, that's pretty much in line with the percentage move in the actual CBOE Volatility Index (VIX). Unlike the actual VIX, though, XOP volatility has only dropped back to the low 40s.

One warning, though: Be careful deriving too much signal when options are telling you the same story as the stocks themselves. If we saw all this put interest while the energy patch was booming, it would tell me that no one believes in the boom, and the public at large is trying to catch a top. That rarely works in the aggregate. But, a spike in put interest in a weak group? That makes some sense.

Now, don't get me wrong: I'm not saying that action is bearish. It's not likely "sharps" are loading up on puts now. It's just that it's a weak bullish signal.

It is interesting that XOP has recovered better than crude itself. It bottomed at $52.15 in mid-October, about when crude was first hitting lows. It has since popped to the mid-$59s. So, maybe the masses already have backed up the volatility truck at the bottom? If nothing else, it's a level to lean against.

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 mixed at midday, with blue-chips enjoying a halo lift from Visa Inc (NYSE:V), while tech stocks are sticking close to the flat line. Among equities attracting the attention of analysts are electric vehicle maker Tesla Motors Inc (NASDAQ:TSLA), as well as battered commodity concerns Barrick Gold Corporation (USA) (NYSE:ABX) and Goldcorp Inc. (USA) (NYSE:GG).

  • TSLA is down 0.4% at $237.15, despite a fresh "buy" initiation and $320 price target at Ascendiant Capital. The brokerage firm opined that TSLA's "valuation will increase on growth from new product introductions and geographic expansions," and said it's "remarkable … that the traditional automobile industry is unable or unwilling to respond to this clear threat" from Tesla Motors Inc's Model S. On the charts, TSLA remains nearly 58% higher year-to-date, but option traders have grown increasingly put-heavy ahead of the company's earnings release next Tuesday night. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.54 sits just 3 percentage points from a 12-month peak, suggesting short-term traders have rarely been more put-biased during the past year.

  • ABX is down 4% at $12.32, and earlier touched a new 22-year low of $12.20, due to the combination of sinking gold prices and concerns about the company's Lumwana copper mine. While Barrick Gold Corporation (USA) reported stronger-than-expected quarterly earnings, the firm said it will cut debt next year to curb weak gold prices, and warned that it may be forced to close its Zambia-based mine if the government executes a plan to hike mineral royalties. While Cowen and Company lifted its price target on ABX to $10.96 from $10.90, BMO trimmed its target to $17 and reiterated a "market perform" rating. Outside of the analyst community, ABX's recent crop of option bears are likely cheering today's post-earnings swoon, though the stock has yet to breach the recently popular 12 strike.

  • In similar fashion, GG is 10.2% lower at $19.33, and earlier touched a near-six-year low of $19.19, after confessing to weaker-than-expected third-quarter earnings. The stock is now 10.8% lower year-to-date, yet analysts at J.P. Morgan Securities said now could be an opportune time to buy Goldcorp Inc. (USA) on a dip. "The market should look through this result to the stronger company with a portfolio of young, lower-cost assets that should crystallize by year-end market," the brokerage firm said. Most analysts are already in GG's bullish camp, as the stock boasts 10 "buy" or better endorsements, compared to five "holds" and just one "sell." Likewise, the consensus 12-month price target of $36.02 represents a premium of 86.3% to GG's current price. Should the shares extend their retreat, a round of downgrades and/or price-target cuts could exacerbate selling pressure on the equity.

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Stocks On the Move: Visa Inc, TASER International, Inc., and Twitter Inc

V, TASR, and TWTR are moving sharply in Thursday's trading

by 10/30/2014 12:44 PM
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Markets are mostly higher at midday, with credit card concern Visa Inc (NYSE:V) helping send the Dow to a triple-digit lead. Among other equities seeing notable moves are stun gun maker TASER International, Inc. (NASDAQ:TASR) and microblogging giant Twitter Inc (NYSE:TWTR). Here's a quick look at how V, TASR, and TWTR are performing on the charts so far.

  • V's better-than-expected fiscal fourth-quarter earnings report -- and upbeat outlook for the mobile payment industry -- was met with a round of price-target hikes, including one from Morgan Stanley, which upped its outlook by $22 to $270, while underscoring its "overweight" rating. FBR also weighed in, raising its recommendation on Visa Inc to "outperform" from "market perform." Against this backdrop, the shares have surged 9% to trade at $234.06 -- into the black on a year-to-date basis -- after earlier tagging a fresh record peak of $235.53. Today's bullish gap is most likely disappointing option traders, who had grown increasingly bearish on the equity in the months leading up to last night's report. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, the stock's 50-day put/call volume ratio of 0.98 ranks just 6 percentage points from a 52-week peak.

  • Also surging in the wake of a strong earnings report is TASR, which was last seen 7.3% higher at $17.67. Heading into today's session, the stock was sitting on a modest 3.7% year-to-date gain, and should the security continue its post-earnings momentum, a capitulation from some of the weaker bearish hands could help propel TASR higher. On the options front, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.58 ranks in the 89th percentile of its annual range, meaning short-term speculators have rarely been as put-skewed toward TASR as they are now. Elsewhere, short interest jumped 28.2% over the past two reporting periods, and now accounts for more than 16% of the stock's available float. What's more, it would take more than four sessions to cover these bearish bets, at TASER International, Inc.'s average daily pace of trading.

  • TWTR is still reeling in the wake of its earnings report , and last night, was dealt another fundamental blow when it was reported two of the company's key executives were hitting the bricks. The stock is down 0.8% at $41.73 as a result, and earlier breached the round-number $40 mark for the first time since late July. Thanks to today's slide, the equity is on pace to log a weekly loss of more than 16%. Given Twitter Inc's recent struggles, the door is wide open for a round of downgrades and/or price-target cuts, which could pressure the shares even lower. In fact, more than half of analysts covering the security maintain a "buy" or "strong buy" rating, while the consensus 12-month price target of $52.06 stands at a 24.3% premium to current trading levels.

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Analyst Upgrades: F5 Networks, Inc., RF Micro Devices, Inc., and Take-Two Interactive Software, Inc.

Analysts upwardly revised their ratings on FFIV, RFMD, and TTWO

by 10/30/2014 9:35 AM
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Analysts are weighing in today on IT issue F5 Networks, Inc. (NASDAQ:FFIV), radio frequency solutions specialist RF Micro Devices, Inc. (NASDAQ:RFMD), and video game maker Take-Two Interactive Software, Inc. (NASDAQ:TTWO). Here's a quick roundup of today's bullish brokerage notes on FFIV, RFMD, and TTWO.

  • A rash of brokerage firms weighed in on FFIV this morning, after the company posted fiscal fourth-quarter earnings and revenue that exceeded estimates, and announced the retirement of CEO John McAdam. The most optimistic of outlooks came from Pacific Crest, which raised its price target to $153 from $151 -- and underscored its "outperform" rating -- representing expected upside of 30.6% to last night's closing price of $117.12. On the sentiment front, option traders displayed a slight bearish bias toward F5 Networks, Inc. in the weeks leading up to last night's results. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.83 ranks in the 66th percentile of its annual range.

  • RFMD received no fewer than four price-target hikes after unveiling its fiscal second-quarter earnings report, including one from Canaccord Genuity. Specifically, the brokerage firm upped its price target to $16 from $12.50, and raised its outlook to "buy" from "hold." The shares have more than doubled in value on a year-to-date basis, and closed last night at $12.05. In the options pits, traders have been scooping up bullish bets in a flurry, as evidenced by the equity's 10-day ISE/CBOE/PHLX call/put volume ratio of 97.09, which ranks higher than 92% of similar readings taken in the past year. With 24.2% of RFMD's float sold short, though, a portion of this call buying could be at the hands of shorts hedging their bearish bets against any post-earnings upside. In early trading, RF Micro Devices, Inc. is up about 1%.

  • TTWO popped 5% out of the gate to explore six-year highs near $24.50. Take-Two Interactive Software, Inc. last night reported a narrower-than-expected fiscal second-quarter loss, and lifted its fiscal-year outlook. No fewer than 10 brokerage firms hiked their price targets on TTWO, with the most ambitious being MKM, which lifted its target to $30 from $27 -- representing expected upside of 31.6% to the stock's Wednesday close at $22.80, and in record-high territory. In addition, Brean upgraded its opinion to "buy" from "hold." One group not celebrating TTWO's earnings victory? Short sellers. Short interest accounts for 18.7% of the stock's total available float, representing nearly eight sessions' worth of pent-up buying demand, at the stock's average pace of trading -- plenty of fuel for a short-covering rally.

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Analyst Downgrades: DreamWorks Animation SKG, Inc., SunPower Corporation, and Glu Mobile Inc.

Analysts downwardly revised their ratings on DWA, SPWR, and GLUU

by 10/30/2014 9:23 AM
Stocks quoted in this article:

Analysts are weighing in today on movie studio DreamWorks Animation SKG, Inc. (NASDAQ:DWA), alternative energy concern SunPower Corporation (NASDAQ:SPWR), and mobile game maker Glu Mobile Inc. (NASDAQ:GLUU). Here's a quick roundup of today's bearish brokerage notes on DWA, SPWR, and GLUU.

  • DWA is pointed 1.8% higher ahead of the bell, after the firm said the blockbuster performance of "How to Train Your Dragon 2" translated into stronger-than-expected third-quarter earnings. Nevertheless, Janney downgraded DWA to "neutral" from "buy," echoing the already bearish tone among the brokerage bunch. In fact, DreamWorks Animation SKG, Inc. boasts just one "strong buy," compared to six tepid "holds" and two "sell" or worse ratings. Likewise, the consensus 12-month price target of $22.22 represents a discount to DWA's closing price of $23.29 on Wednesday. Short-term option players, on the other hand, are likely applauding the earnings beat. The stock's Schaeffer's put/call open interest ratio (SOIR) sits at an annual low of 0.42, suggesting DWA's near-term traders haven't been more call-heavy during the past year.

  • SPWR is flirting with breakeven at $30.31 in pre-market action, even as analysts continue to react to yesterday's lackluster earnings guidance. Specifically, Cowen cut its price target to $46 from $50, but maintained an "outperform" rating, while RBC trimmed its price target by $1 to $35, and reiterated a "sector perform" opinion. (Canaccord Genuity, meanwhile, upgraded SPWR to "buy" from "hold.") In the options pits, SunPower Corporation traders were picking up puts over calls at an annual-high pace ahead of earnings, as the stock's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at a 12-month high of 2.20. The stock's post-earnings reaction was relatively tame, however, as the shares dipped just 1.7% Wednesday, and remain in the black on a year-to-date basis.

  • Finally, GLUU is poised to plummet 16% out of the gate, as analysts pan the company's current-quarter forecast. Canaccord Genuity reduced its price target on the stock to $6 from $8, but upheld a "buy" rating, while Piper Jaffray cut its target to $5 from $7, while maintaining an "overweight" opinion. As of last night, the shares of Glu Mobile Inc. were up 16.8% year-to-date to trade at $4.53, but were struggling to topple their 50-week moving average. More negative analyst notes could exacerbate post-earnings selling pressure on the stock, which boasts six "strong buys" and two "holds," with not a single "sell" in sight. Plus, the consensus 12-month price target of $7.82 represents a steep premium to GLUU's current price.

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