The stock market has made some serious headway since its March 9 bottom, with the S&P 500 Index (SPX) up more than 50% from its first-quarter nadir. Since that time, Capital One Financial Corp. (COF: sentiment, chart, options) has emerged as the leader of the rebound, with the credit card concern soaring 354% from March 9 through Tuesday's close. Amid the recent pullback in the broader market, we decided to see whether COF is well-positioned to continue its trailblazing rally.
Checking out the charts
First, a quick disclaimer about our methodology: when we say that COF has been the best-performing stock amid the market's rebound, we're referring only to equities that closed above $8 per share on both March 9 and Oct. 27. This filters out any penny stocks that racked up ridiculously bullish returns -- including the likes of Human Genome Sciences (HGSI), which vaulted nearly 3,400% higher from its March 9 close of 55 cents per share.
Having cleared the air on that front, we already noted that COF added 354% during a time period when the SPX added just 57%. (Not to downplay the accomplishments of the broad-market index, of course; we say "just" 57% only in comparison to COF's stellar advance.) The equity hasn't lost any of its relative-strength momentum of late, either. Looking back over the past 20 trading days, COF has bested the SPX by about 10 percentage points.
Throughout the stock's ascent, COF has enjoyed the support of its 10-day, 20-day, 50-day, and 80-day moving averages. These four trendlines have collaborated to contain all of the equity's daily closes since March 31.
Of course, there can be a downside to emerging as a relative-strength leader. Once the broader market's upside momentum begins to wane, these outperformers can potentially be hammered by selling pressure. So, in order to see whether COF is poised to keep climbing -- or potentially plummet from its pedestal -- we decided to size up the stock's sentiment backdrop to see how investors are feeling.
Puts still dominate near-term open interest
Despite COF's impressive price action for most of the year, option traders still prefer puts over calls by a noteworthy margin. The equity's Schaeffer's put/call open interest ratio (SOIR) is docked at 1.46, with puts easily outnumbering calls among options set to expire within three months. This SOIR ranks near the middle of COF's annual range, hinting that the current bias toward bearish bets is more or less the norm for this stock.
Likewise, data from the Chicago Board Options Exchange (CBOE) and the International Securities Exchange (ISE) reveals that puts bought to open on COF have outpaced calls since the beginning of September. During this time frame, speculators have snapped up an average of 1.28 puts for every call on the shares.
Considering COF's impressive uptrend, it's important not to read too much into this heavy buy-to-open put volume. Since so many new buyers have obviously flocked to the security in recent months, it's possible that some of these puts were purchased simply to hedge a long stock position. However, the relative lack of call speculation on such a high-flying equity indicates that the bullish bandwagon is still far from overcrowded.
Less ambiguous is COF's short interest data. As the chart below clearly reveals, the number of shares sold short has plummeted, particularly in recent months -- tracking almost directly inversely to the stock's price. In other words, the rally in COF has been supported in no small part by short covering. And, with about 4% of the stock's float still dedicated to short interest, this source of buying pressure isn't yet tapped.
Finally, analysts have also been slow to capitulate to COF's uptrend. Zacks currently reports 14 "hold" or "sell" ratings, compared to just three "buy" or better recommendations. This leaves ample opportunity for potential upgrades going forward.
Overall, we like COF's prospects during the near term. The stock boasts positive price action, multiple layers of technical support, and a healthy supply of bearish sentiment that could unwind to fuel future gains.
As always, please contact us with any questions, comments, or suggestions for future columns.
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