Schaeffer's Trading Floor Blog

Did Ebola 'Cause' the October Sell-Off?

Surveying the relationship between Ebola-related news and market fears

by 11/17/2014 9:08 AM
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I've written somewhat sarcastically a few times about the degree to which Ebola "caused" the market ugliness in October. I didn't mean to minimize Ebola -- it's horrible. I just meant to highlight what I thought was a pretty unlikely causality.

I understand there's a societal mood aspect to market action. And, putting "we're all going to get Ebola" on the cable news networks 24/7 could certainly impact that mood. But anyone who took the 10 seconds to read anything scientific beyond the hyperventilation would have seen that the likelihood of an epidemic here, or anywhere in the industrialized world, was very remote. So, it seemed illogical that the market would react much to cable news. Perhaps I was wrong, though. This, from Business Insider:

Bloomberg chief economist Michael McDonough tweeted this chart overlaying the frequency of ebola-related newswire stories with the VIX, or the CBOE Volatility Index. The VIX, a rough measure of traders' fears spiked as the markets sold off and then receded when the markets came back.

As you can see, there's a pretty decent correlation between the number of Ebola virus stories and the magnitude of the VIX.

I stand corrected. There are always lots of moving parts in a market. This doesn't "prove" Ebola led to the CBOE Volatility Index (VIX) pop and market drop. But visually, that's a pretty strong relationship. In hindsight, this is really market dynamics 101 more than anything else. The market was clearly ready for a shakeout; all it needed was a catalyst. And then along came Ebola, and away we went. And then, as the Ebola fears receded, so did market fears as evidenced by the VIX.

But to me, it's still a mistake to assume there's a causality there. If Ebola had stayed at the top of the news a little longer, it's likely the market would have started to ignore it and rally anyway. That's because we never got around to the whole "discounting" step. That is to say, news stays bad, but the market has "fully priced it in" and we start rallying anyway. We never really got there. The Ebola news did indeed get better, but even it if had gotten somewhat worse first, the market would have started looking past it.

Anyway, that chart of the correlation really is pretty interesting. I just don't think there's that much to learn from it going forward. If Ebola strikes here again (and, look, it's likely, since it's not eradicated), I doubt it corresponds to any sort of market move. VIX will pop and the market will shake out again -- it always does. It will just have a different driver.

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


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Analyst Update: Yahoo! Inc., TripAdvisor Inc, and RF Micro Devices, Inc.

Analysts are weighing in on YHOO, TRIP, and RFMD

by 11/14/2014 2:47 PM
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Markets have moved lower this afternoon as traders take some profits off the table ahead of the weekend. Meanwhile, among equities in focus are Internet issue Yahoo! Inc. (NASDAQ:YHOO), online travel company TripAdvisor Inc (NASDAQ:TRIP), and semiconductor specialist RF Micro Devices, Inc. (NASDAQ:RFMD), which have all attracted the attention of analysts.

  • YHOO tagged another 14-year peak of $51.95 earlier -- but was last seen up 2.5% at $51.77 -- after FBR boosted its price target on the shares to $60 from $50, and underscored its "outperform" rating. It's been a standout year for Yahoo! Inc., which has rallied 28%, and a continued rise could prompt another round of bullish brokerage notes. At present, nine of the 25 analysts covering the shares still maintain a tepid "hold" rating, and the consensus 12-month price target of $49.68 stands at a discount to current trading levels.

  • TRIP, meanwhile, wallowed to a fresh annual low of $67.14 this morning, following a price-target cut to $80 from $87 -- and lackluster "hold" recommendation -- at Evercore. However, this new price target still represents expected upside of 15.8% to the stock's present price of $69.11. On the charts, the security has been steadily losing ground since topping out at a record high of $111.24 in late June, and is down almost 38% from this technical milestone. Option traders and short sellers alike are gambling on additional losses for the shares. TRIP's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 2.00 ranks in the bearishly skewed 85th percentile of its annual range. Short interest, meanwhile, accounts for a lofty 9.9% of the equity's available float, and would take seven sessions to cover, at TripAdvisor Inc's average daily pace of trading.

  • Pacific Crest weighed in on RFMD earlier, raising its price target by $1 to $15, and reiterating its "outperform" rating. This echoes the withstanding trend witnessed among the brokerage bunch, with 69% of covering analysts maintaining a "buy" or "strong buy" suggestion, and the average 12-month price target of $15.33 standing in territory not charted since June 2002. Option traders, meanwhile, have taken a more skeptical route, as evidenced by RFMD's 50-day ISE/CBOE/PHLX put/call volume ratio of 0.15, which ranks higher than 76% of similar readings taken over the past year. Given RF Micro Devices, Inc.'s impressive 162% year-to-date advance that has the stock lingering near $13.50, though, a portion of this recent put buying may have been at the hands of shareholders protecting paper profits.

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Markets are sticking close to the flatline this afternoon, as traders digest the latest round of economic data. Meanwhile, among equities making notable moves are car rental concern Hertz Global Holdings, Inc. (NYSE:HTZ), oil-and-gas issue Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), and Beijing-based Internet issue Bitauto Hldg Ltd (ADR) (NYSE:BITA). Here's a quick look at how HTZ, PBR, and BITA are performing on the charts so far.

  • HTZ has plunged almost 13% to $19.80 this afternoon, after the company said it will restate its financial statements for 2011 through 2013 amid accounting errors that will reduce previously stated net income by roughly $87 million, collectively. Additionally, Hertz Global Holdings, Inc. announced plans to cut costs by $100 million. It's been a tough two months for HTZ both on and off the charts, and since topping out at a record peak of $31.61 in late August, the shares have surrendered 37% of their value. Against this backdrop, option traders have been upping the bearish ante, as evidenced by the stock's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.15, which ranks in the 98th annual percentile.

  • In the midst of an ongoing money laundering and bribery scandal -- which included today's arrest of a former executive -- PBR said it is delaying the release of its third-quarter earnings report, which was slated for early next Monday. As such, the stock plunged to a nine-year low of $9.51 earlier, but was last seen down 3.3% at $9.85. Similar to HTZ, the equity has had a hard time on the charts since hitting an annual high of $20.94 in early September, with Petroleo Brasileiro Petrobras SA (ADR) off nearly 53% -- a move not gone unnoticed by option traders. In fact, the stock's 50-day ISE/CBOE/PHLX put/call volume ratio of 0.42 ranks just 2 percentage points from a 52-week peak, meaning puts have been bought to open over calls at a near-annual-high clip in recent months. In today's session, a number of speculators are betting on a steeper retreat into single-digit territory, and are buying to open PBR's December 10 puts.

  • Following in the post-earnings footsteps of sector peer Alibaba Group Holding Ltd (NYSE:BABA) is BITA, which has rallied nearly 14% to $90.25, thanks to its well-received earnings report and upwardly revised current-quarter revenue forecast. Today's bullish gap is nothing new for a stock that's nearly tripled in value on a year-to-date basis, and a continued rise could prompt a round of price-target hikes from the brokerage bunch. At present, Bitauto Hldg Ltd's (ADR) consensus 12-month price target of $81 stands at a discount to current trading levels.

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Analyst Downgrades: Biogen Idec Inc, Lululemon Athletica inc., and SINA Corp

Analysts downwardly revised their ratings on BIIB, LULU, and SINA

by 11/14/2014 9:40 AM
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Analysts are weighing in today on biotech firm Biogen Idec Inc (NASDAQ:BIIB), yoga apparel maker Lululemon Athletica inc. (NASDAQ:LULU), and Chinese media company SINA Corp (NASDAQ:SINA). Here's a quick roundup of today's bearish brokerage notes on BIIB, LULU, and SINA.

  • Citigroup removed BIIB from its "most preferred pharma" list, citing concerns about the company's multiple sclerosis treatment, as well as patent litigation. Technically speaking, however, the stock has shot 33.8% higher over the past 12 months, as of yesterday's close at $317.98. That said, Biogen Idec Inc may be in a position to benefit from an unwinding of pessimism 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 across those exchanges is 1.29 -- just 18 percentage points from an annual high. In other words, traders have been buying to open BIIB puts over calls at a faster-than-usual pace recently.

  • LULU saw its rating cut to "underperform" from "neutral" at Sterne Agee, and has stumbled 1.2% out of the gate to $44.64. Longer term, the stock has struggled, shedding 24.4% of its value in 2014. Understandably, the Street has been skeptical of Lululemon Athletica inc., as 19 out of 26 covering analysts have given the shares a "hold" or worse rating. What's more, nearly 21% of LULU's float is sold short, which would take more than three weeks to buy back, at average daily trading volumes.

  • Finally, SINA's disappointing revenue forecast is overshadowing its third-quarter earnings beat this morning, and the stock is getting hammered with bearish brokerage notes. Specifically, no fewer than four analysts lowered their price targets on SINA Corp, while Stifel downgraded the shares to "hold" from "buy." This morning, the security is sitting 6% lower at $39.35, which brings its year-to-date deficit beyond 53%. Not surprisingly, traders at the ISE, CBOE, and PHLX have been eyeing a move lower in recent weeks, as SINA's 10-day put/call volume ratio of 0.43 rests above four-fifths of comparable readings taken in the last year.

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Buzz Stocks: Geron Corporation, Baker Hughes Incorporated, and BlackBerry Ltd

Today's stocks to watch in the news include GERN, BHI, and BBRY

by 11/14/2014 9:28 AM
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U.S. stocks are holding steady this morning, as speculators digest reports on retail sales and consumer sentiment. Among the equities in focus are biopharmaceutical firm Geron Corporation (NASDAQ:GERN), oil-and-gas issue Baker Hughes Incorporated (NYSE:BHI), and smartphone maker BlackBerry Ltd (NASDAQ:BBRY), which have all unveiled new partnerships.

  • GERN is poised to pop 38.5%, after the firm licensed its cancer compound, imetelstat, to Johnson & Johnson (NYSE:JNJ) for up to $935 million -- $35 million of which will be paid upfront. As a result, Piper Jaffray upgraded its opinion of GERN to "overweight." Today's upside could gain momentum as the shorts hit the bricks, as short interest represents 17.7% of Geron Corporation's total available float. In fact, it would take more than 13 sessions to repurchase these pessimistic positions, at the equity's average daily trading volume. Prior to today, GERN was sitting on a 48.4% year-to-date deficit at $2.31, with rebound attempts stifled by the stock's 50-week moving average.

  • BHI is headed 5% higher, as traders applaud preliminary merger talks with oil titan Halliburton Company (NYSE:HAL). The buzz hit the Street in the final hour of yesterday's session, sending the shares of Baker Hughes Incorporated 15.2% higher to land at $58.75 -- just short of their 10-week moving average, which hasn't been toppled on a weekly closing basis since late July. Prior to that, BHI had been churning in the $52-$54 area -- and in the red on a year-to-date basis -- as crude oil plumbed multi-year lows. As such, option buyers were growing increasingly skeptical, as evidenced by the stock's 50-day put/call volume ratio of 1.30 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- in the 91st percentile of its annual range.

  • Finally, BBRY yesterday debuted its BES 12 platform, and announced a "very serious relationship" with South Korea's Samsung Electronics to offer a "highly secure mobility solution" for Android devices, starting next year. However, the company has no immediate plans to take on the massive Chinese market, and expects it would generate "better returns going into a different set of markets that we are already in, like India, South Asia, and Southeast Asia," CEO John Chen said. In light of the Samsung deal, BBRY shares bolted 7% higher yesterday, landing at $12.06 -- in territory not charted since August 2013. A flood of upgrades could add fuel to the equity's fire, as not one of the 20 analysts following the stock deems it worthy of a "buy" or better rating. Furthermore, price-target hikes could be on the horizon, as the consensus 12-month price target of $10.37 represents a discount to the stock's current perch. In fact, J.P. Morgan Securities this morning upped its target to $13 from $10, suggesting the tide could be shifting.

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