Schaeffer's Trading Floor Blog
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U.S. stock futures are set to open lower this morning, with traders eyeing a fresh round of sanctions levied against Russia by members of the European Union. In company news, today's stocks to watch include retailer Family Dollar Stores, Inc. (NYSE:FDO), fast-food giant McDonald's Corporation (NYSE:MCD), streaming entertainment provider Netflix, Inc. (NASDAQ:NFLX), and egg producer Cal-Maine Foods Inc (NASDAQ:CALM).

  • Family Dollar Stores, Inc. (NYSE:FDO) is nearly 25% higher in pre-market trading, after sector peer Dollar Tree, Inc. (NASDAQ:DLTR) agreed to acquire the chain for roughly $8.5 billion, or $74.50 per share. Activist investor Carl Icahn, who owns 9.4% of FDO, had been pushing for the discount retailer to sell itself. (Reuters)

  • Due to extensive food recalls amid a scandal at its Shanghai processing facility, McDonald's Corporation (NYSE:MCD) is facing shortages at its Chinese locations. Over the weekend, at least one mainland MCD outpost was able to offer customers only side items, desserts, and beverages. (CNNMoney)

  • Speculation suggests that Netflix, Inc. (NASDAQ:NFLX) could acquire the streaming rights to Seinfeld when the classic sitcom's broadcast and cable syndication deals expire in a couple of months. Rumors began to circulate after Jerry Seinfeld indicated that "conversations are presently taking place" during a Reddit AMA last week. (Bloomberg Businessweek)

  • Apple Inc. (NASDAQ:AAPL) is reportedly close to a $30 million deal to acquire the talk-radio app Swell. The rumored acquisition could be an effort to replace Apple's own app for streaming talk content, which has been panned by Apple Store reviewers. (Re/code)

  • Virgin America has filed for a U.S. initial public offering (IPO), with Barclays and Deutsche Bank Securities acting as lead underwriters. Virgin currently flies to 22 cities across the U.S. and Mexico, and landed top honors two years in a row in the annual Airline Quality Rating study. (Reuters, via CNBC)

  • On the earnings front, Cal-Maine Foods Inc (NASDAQ:CALM) and Tyson Foods, Inc. (NYSE:TSN) both reported their latest quarterly results. (MarketWatch; Bloomberg Businessweek)

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The Impact of High-Frequency Trading on Volatility

Is HFT the reason intraday volatility is compressing?

by 7/28/2014 9:01 AM
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As we've noted often recently, small-cap volatility has hit record levels versus big-cap volatility this year. "Record" requires a little perspective, as we can only go back to 2007 on Russell 2000 Index (RUT) volatility, but still, it's very noteworthy.

Perhaps we can blame (or thank) high-frequency trading (HFT). This, from Credit Suisse via The Wall Street Journal:

New data out from Credit Suisse points to some of the salutary effects of high-frequency trading. Researchers at the Swiss bank's New York offices posit that HFT activity has helped inoculate large-caps from the effects of macroeconomic market stresses.

Their analysis, in a note released Wednesday, shows price volatility is much more subdued in the stocks of companies with large market capitalizations -- whose deeper liquidity HFT generally prefers -- than it is in their small-cap peers.

Looking at stocks that moved at least 1% within one minute, researchers found spikes in small-caps at moments of instability, like the 2011 U.S. debt downgrade. But in large-caps, there wasn't a blip.

As Credit Suisse put it: "The numbers have been declining consistently every year post-crisis, as HFT has become a larger part of the market. Not so for smallcaps."

It brings up the eternal question about coincidence vs. causation. Is HFT really causing intraday volatility to compress, or are we just selectively viewing a time period where volatility is declining anyway and adding an arbitrary threshold on top of it?

Credit Suisse uses that 1% within one-minute criteria as a proxy for volatility. And that's fine. But, perhaps, in a generally low-volatility environment, that simply knocks out a host of big caps. Remember, smaller caps are just naturally more volatile than big caps, anyway. Not to mention they, on average, will have much lower absolute-dollar price tags on them. That might matter in a big way in a study like the one mentioned above it's much more likely for a relatively lightly traded $10 stock to blip a dime in a heartbeat than it is for a heavily traded $100 stock to blip $1. And again, that's especially true in a generally low-volatility backdrop.

What if they reduced the criteria to 0.5%, would that change how their graphs look? I don't know for sure, but I suspect it would.

I don't believe their study itself is flawed in any particular way, I just believe they reach an unprovable conclusion. It needs more corroborating evidence. HFT would reduce volatility if it added liquidity to the marketplace. It certainly adds to volume, but liquidity is not synonymous with volume.

Here's a pretty long read from Nanex highlighting a few milliseconds of trading in Ford Motor Company (NYSE:F). Long story short, it's your classic "Trader tries to lift offer, buy order gets rerouted, offers cancel and/or gets lifted before trader fills order" story that happens over and over again in big-cap names. It's a pretty typical event in a world of algorithms, and it's really tough to make the logical case that this has served to increase liquidity and reduce volatility.

Bottom line is, there's lots of moving parts that go into market volatility. HFT certainly has an impact on volatility, but there's really no single way to isolate that impact short of having a "control" market somewhere that's identical in every other way except for the algos. Big stocks blipping 1% relatively infrequently over a time period when HFT has grown does not in any way prove that HFT keeps stocks from blipping 1%.

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

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Analyst Upgrades: Reynolds American, Inc., Time Warner Inc, and Zillow Inc

Analysts upwardly revised their ratings on RAI, TWX, and Z

by 7/28/2014 8:58 AM
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Analysts are weighing in today on cigarette manufacturer Reynolds American, Inc. (NYSE:RAI), media and entertainment firm Time Warner Inc (NYSE:TWX), and real estate website Zillow Inc (NASDAQ:Z). Here's a quick roundup of today's bullish brokerage notes.

  • In the wake of RAI's agreement to buy rival Lorillard Inc. (NYSE:LO) a couple of weeks ago, the cigarette maker was raised to "top pick" from "outperform" at RBC this morning. It's no wonder, with the shares tacking on 13.7% year-to-date to trade at $56.86, and resting atop a potential layer of support at their early March highs. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), however, Reynolds American, Inc. has racked up a 10-day put/call volume ratio of 0.98 -- ranking in the bearishly skewed 78th percentile of its annual range. Should the stock continue to outperform, or should the company report stronger-than-expected earnings tomorrow morning, a capitulation among these bearish bettors could result in tailwinds.

  • TWX gapped higher recently on a proposed buyout from Twenty-First Century Fox Inc (NASDAQ:FOXA), and hasn't looked back. At last check, the shares have advanced more than 27% year-to-date, and currently rest at $84.99. On the sentiment front, Morgan Stanley upped its price target on TWX to $95 from $76, and reaffirmed its "overweight" rating. This is more of the same for the stock, which has received 15 "buy" or better opinions, compared to seven "holds" and not a single "sell" recommendation. In other news, Bloomberg reported over the weekend that FOXA is open to giving Time Warner Inc shareholders seats on the board, should the companies merge.

  • Finally, Z, which closed Friday at $158.86, has nearly doubled in value this year. What's more, the equity has outperformed the broader S&P 500 Index (SPX) by 41.3 percentage points during the last three months, but was halted in pre-market trading amid just-confirmed plans to buy Trulia Inc (NYSE:TRLA) for $3.5 billion in stock. The real estate name received a pair of price-target hikes earlier at Benchmark (to $178) and Susquehanna (to $200). Still, nearly one-third of Zillow Inc's float is sold short, which would take more than a week to cover, at the stock's average daily trading volume. In other words, the shares could be on the verge of a short-covering rally.

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Earnings on Deck: Inc, Herbalife Ltd., and Sirius XM Holdings Inc.

Taking a closer look at SOHU, HLF, and SIRI ahead of their earnings results

by 7/25/2014 2:27 PM
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Wall Street has digested a slew of corporate earnings reports this week, and looking ahead to next week, quarterly results from Chinese Internet issue Inc (NASDAQ:SOHU), nutritional supplements specialist Herbalife Ltd. (NYSE:HLF), and satellite radio issue Sirius XM Holdings Inc. (NASDAQ:SIRI) will be in focus. Here's a quick look at this trio of names as earnings approach.

  • Barclays weighed in on SOHU ahead of Monday's early morning earnings report, expressing caution toward the company's margins with a $1 price-target cut to $78, but maintaining its "buy" recommendation on the equity. This "buy" rating defies the relatively skeptical tone the brokerage bunch has taken toward SOHU, with five "hold" or "sell" suggestions levied toward the security, versus two "strong buys." In today's session, the equity is 1% higher to trade at $56.71 -- thanks to an earnings-induced halo lift from sector peer Baidu Inc (ADR) (NASDAQ:BIDU) -- but could be poised to erase these gains in the wake of its own results. In fact, over the past eight quarters, Inc has averaged a single-session post-earnings loss of 2.5%, which widens to 2.9% when going out one week.

  • HLF is poised to finish the week up nearly 9%, after traders brushed off dire words of warning from activist investor Bill Ackman. Longer term, though, the equity is still off roughly 16% year-to-date -- yet the brokerage bunch remains decidedly optimistic. Specifically, four out of five covering analysts maintain a "strong buy" rating toward Herbalife Ltd., and the consensus 12-month price target of $85.50 stands at a 29% premium to the security's current perch at $66.12. Looking ahead to Monday evening's earnings report, Wall Street is calling for a profit of $1.57 per share for HLF's second quarter. Historically, the company has exceeded analysts' bottom-line estimates in each of the past eight quarters, resulting in an average single-session post-earnings advance of 0.3% for the stock.

  • Over the past eight quarters, SIRI has matched or exceeded consensus profit estimates five times, translating into an average gain of 1.4% in the subsequent session. When Sirius XM Holdings Inc. steps up to the earnings plate bright and early Tuesday morning, analysts are expecting the company to post a second-quarter profit of 2 cents per share. On the charts, the stock is sitting at $3.43 -- about 2% below its year-to-date breakeven level -- yet the consensus 12-month price target of $4.31 sits in territory not charted by SIRI since November 2006. Plus, seven out of nine covering analysts have rated the equity a "strong buy," with not a single "sell" to be found. Should SIRI buck its historical trend and turn in a poorly received report, a re-evaluation of ratings from this optimistic bunch could pressure the shares lower.

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Stocks on the Move: WellCare Health Plans, Inc.,, Inc., and Trulia Inc

WCG, AMZN, and TRLA are moving sharply in Friday's trading

by 7/25/2014 1:28 PM
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U.S. markets are trading decidedly lower today, as a handful of poorly received earnings reports and new developments in Ukraine and Gaza spark a risk-off session. Among names making notable moves are healthcare concern WellCare Health Plans, Inc. (NYSE:WCG), online retailer, Inc. (NASDAQ:AMZN), and real estate stock Trulia Inc (NYSE:TRLA). Here's a quick roundup of how this trio of names is performing on the charts so far.

  • WCG has gapped 20% lower today to trade at $61.40, after the company last night reported an unexpected loss in its second quarter due to high Medicaid costs in Florida, and cut its full-year profit forecast in half. Adding to the bearish bias was a price-target cut to $70 at Wedbush, and downgrades to "market perform" from "outperform" at both Raymond James and Wells Fargo. Today's plunge -- the most of any name on the Big Board -- sent the stock straight to the short-sale restricted (SSR) list and into the red on a year-to-date basis. Plus, WellCare Health Plans, Inc. is now trading more than 25% below the consensus 12-month price target of $76.93, meaning another round of bearish brokerage notes could be on the horizon.

  • AMZN's steeper-than-expected second-quarter loss -- and subsequent 10% drop on the charts -- is being widely cited as a catalyst for today's broad-market sell-off. The news was met with a round of downwardly revised brokerage notes on the Street, and with 22 "buy" or better ratings levied toward the stock out of 27 covering analysts, additional downgrades may be in AMZN's future. Meanwhile, in the options pits, puts are trading at nearly eight times the intraday average this afternoon. However, with, Inc. also being on the SSR list, it's no surprise to find traders looking for alternate ways to bet bearishly on the stock. At last check, AMZN was trading at $323.25, after earlier tagging an intraday low of $314.76.

  • Bucking today's bearish bias is TRLA, which is up 2.8% to linger near $55.26 -- extending yesterday's 32% pop amid buyout buzz from sector peer Zillow Inc (NASDAQ:Z). The stock is now trading comfortably above the $50 mark -- which coincides with peak put open interest in the front-month August series of options -- suggesting a new layer of short-term support may be forming. Trulia Inc's two-day rally could have short sellers on edge. At present, more than 38% of the stock's float is sold short, and it would take more than seven sessions to cover, at TRLA's average daily trading volume.

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