Schaeffer's Trading Floor Blog

The SPY and Its 200-Day Moving Average, Revisited

Why owning the SPDR S&P 500 ETF Trust (ETF) when its below the 200-day moving average isn't a great idea

by 10/24/2014 9:02 AM
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Ready for another flashback?

All the way back on Oct. 13, the SPDR S&P 500 ETF Trust (SPY) closed below the 200-day moving average for the first time in nearly two years. As we showed a few days later, owning SPY when it's below the 200-day wasn't the greatest idea in the world. But, it was a "bad" trade in a rather odd way.

The SPY has dipped below the 200-day 73 times since its invention in 1993, and if you bought on the first close below the 200-day, and then sold on the first close after, you made a winning trade 67 out of 73 times. But, over the course of time, you missed most of the SPY gains over the last 21 years, thanks to the fact that three of those six losses were disasters.

Well, we can now add a 74th round trip to our database. The SPY closed back above the 200-day on Tuesday. The system would have triggered a buy on the Oct. 13 close of 187.41, and then a sale on the Oct. 21 close of 194.07, for a nice tidy 3.55% profit.

That's actually the best trade in this system since a trade was initiated on Sept. 23, 1999!

But, I really wouldn't recommend this at home. Part of the nice return is thanks to circumstance. The SPY closed at 190.54 on Oct. 19, a mere 0.02 above the 200-day, and then it tanked the next day, giving you a much better entry. Then, on the way back up, SPY closed at 190.30 on Oct. 20, vs. 190.64 on the 200-day. The next day produced a big rally to 194.07, which is our exit point. So, a few pennies either way and you would have had a near-scratch trade, as you could have entered and exited in the 190.5 to 191 range.

In the real world, you shouldn't use any sort of system that's so rigid. It's interesting and informative to look at the history, but there are so many moving parts around each instance that it's never right to stick perfectly to any of these.

The lesson that we learned a couple weeks ago still holds true. A very long run above the 200-day doesn't tend to immediately morph into a disastrous fall under the 200-day. By the time we've gotten back below the 200-day, we've seen most of the damage.

The quickest boom-to-bust turn was in 2008, and even then, you had a few months to get out before the real bear took hold. And let's face it: The 2008 experience is still fresh enough in everyone's memory to color our impression of every shakeout.

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


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Options Check-Up: BlackBerry Ltd, Coach Inc, and Facebook Inc (FB)

Analyzing recent option activity for BBRY, COH, and FB

by 10/24/2014 8:12 AM
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Among the stocks attracting attention from options traders lately are handset maker BlackBerry Ltd (NASDAQ:BBRY), accessories designer Coach Inc (NYSE:COH), and social network Facebook Inc (NASDAQ:FB). Below, we'll break down how options buyers are positioning themselves, and how much speculators are willing to pay for their bets on BBRY, COH, and FB.

  • BBRY ended yesterday's session 4.3% higher at $10.31, bringing its year-to-date advance to nearly 39%. In recent sessions, the shares have found a reliable foothold at the round-number $10 level. Not surprisingly, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open calls over puts at a rapid-fire rate in recent weeks. BlackBerry Ltd's 10-day call/put volume ratio of 6.27 across those exchanges ranks in the 89th percentile of its annual range. What's more, based on the stock's Schaeffer's Volatility Scorecard (SVS) of 100, BBRY has tended to make outsized moves over the past year, relative to what the options market has priced in.

  • COH tacked on 2% to close at $35.94 on Thursday, but remains roughly 36% lower since the start of 2014. During the past 10 weeks at the ISE, CBOE, and PHLX, the equity has racked up a call/put volume ratio of 2.73 -- just 2 percentage points from an annual acme. However, some of these long calls may have been initiated by short sellers hedging their bearish bets ahead of next Tuesday morning's earnings report. After all, nearly one-tenth of Coach Inc's float is sold short, which would take about eight days to buy back, at the security's average daily trading levels. Looking back a year, COH has been more volatile than the options markets has expected, based on the stock's SVS of 85.

  • Finally, FB touched a record high of $80.63 yesterday, and ended 2.1% higher at $80.04. Nevertheless, options traders have been targeting long puts, relative to calls, at an annual-extreme clip recently. Specifically, Facebook Inc's 10-day ISE/CBOE/PHLX put/call volume ratio of 0.77 is higher than all other readings from the previous year -- though some of this activity may have been at the hands of shareholders looking to hedge their long stock positions ahead of the company's third-quarter earnings report, slated for release after next Tuesday's close. Regardless, now is an opportune time to wager on FB with short-term options, as the equity's Schaeffer's Volatility Index (SVI) of 43% rests below 65% of comparable readings recorded during the last 52 weeks.

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Stocks On the Move: Caterpillar Inc., Celgene Corporation, and IPC The Hospitalist Company Inc

CAT, CELG, and IPCM are moving sharply in Thursday's trading

by 10/23/2014 12:52 PM
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U.S. stocks are in the black this afternoon, as Wall Street cheers solid blue-chip earnings. One of the leading Dow components at midday is big-cap construction concern Caterpillar Inc. (NYSE:CAT), and biopharmaceutical issue Celgene Corporation (NASDAQ:CELG) and inpatient care provider IPC The Hospitalist Company Inc (NASDAQ:IPCM) are also making notable moves. Here's a quick look at how CAT, CELG, and IPCM are faring on the charts today.

  • CAT is 4.5% higher at $98.78, second only to 3M Co (NYSE:MMM) among blue chips, and helping prop the Dow to a 242-point lead. CAT traders are celebrating the company's stronger-than-expected quarterly earnings report, as well as an upwardly revised profit outlook for 2014. The shares of Caterpillar Inc. are now 9.2% higher year-to-date, though the equity has yet to enter triple-digit territory today, peaking at $99.94 earlier. In the options pits, short-term traders could be hitting the exits; the stock's Schaeffer's put/call open interest ratio (SOIR) sits at 2.22, indicating that puts more than double calls among options expiring within three months. Furthermore, this ratio stands higher than 88% of all other readings from the past year, implying that near-term traders have rarely been more put-skewed.

  • CELG is up 6.2% to flirt with $100.66, and earlier touched a record high of $100.91 -- marking the stock's first foray north of the century mark. Bolstering the security was a stronger-than-expected third-quarter earnings report, as well as the company's announcement that it's finalizing plans for a Phase III trial of its Crohn's drug. Thanks to today's rally, Celgene Corporation boasts a year-to-date gain of 19.3%, which could intimidate short-term option bears; the equity's SOIR of 0.80 ranks in the 74th percentile of its annual range.

  • IPCM is the worst performer on the Nasdaq, down 17% to linger near $39.05. What's more, the security touched a near-two-year low of $36.12 earlier in the session, as shareholders and analysts balk at the company's downwardly revised full-year outlook. No fewer than four brokerage firms have cut their price targets on IPC The Hospitalist Company Inc, and Wells Fargo downgraded the stock to "market perform" from "outperform." Not everyone is jeering today's swoon, though; short interest accounts for 12.3% of IPCM's total available float, representing more than 16 sessions' worth of pent-up buying demand, at the equity's average pace of trading.

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Analyst Update: Alcatel Lucent SA (ADR), AT&T Inc., and GlaxoSmithKline plc (ADR)

Analysts adjusted their ratings on ALU, T, and GSK

by 10/23/2014 11:40 AM
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Analysts are weighing in today on networking firm Alcatel Lucent SA (ADR) (NYSE:ALU), telecom issue AT&T Inc. (NYSE:T), and pharmaceutical power GlaxoSmithKline plc (ADR) (NYSE:GSK). Here's a quick look at today's brokerage notes on ALU, T, and GSK.

  • ALU is up 4.8% to trade at $2.61, after being upgraded to "hold" from "underperform" at Jefferies. Nevertheless, the shares remain nearly 41% lower on a year-to-date basis, and are facing overhead resistance from their descending 20-day moving average, located at $2.69. Additionally, the equity recently hit a fresh 12-month low. In spite of these unimpressive long-term technicals, Alcatel Lucent SA's (ADR) 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) checks in at 27.53. Relative to the past year's worth of readings, the current ratio ranks in the 70th annual percentile, signaling an unusually strong preference for long ALU calls over puts. On the fundamental front, the company will report third-quarter earnings before the open next Thursday, Oct. 30.

  • T has shed 2.7% to churn near $33.56, after a disappointing third-quarter earnings report prompted no fewer than five brokerage firms to lower their price targets on the security. Similarly, Hilliard Lyons downgraded the stock to "neutral" from "long-term buy." On the other side of the fence, Cowen raised its price target on AT&T Inc. to $39 from $38, to go along with its "market perform" opinion. On the charts, the equity has lost 4.5% in 2014. Elsewhere, options traders have been betting more bearishly than usual on T, per its 10-day ISE/CBOE/PHLX put/call volume ratio of 1.35, which sits higher than more than three-quarters of all other readings from the last year.

  • GSK has tacked on 2.5% to trade at $45.54, following news that the firm may float its HIV unit, Viiv Healthcare. Also helping the shares was an upgrade to "overweight" from "equal weight," and price-target hike to 1,600 pounds from 1,485 pounds, at Barclays -- although Bryan Garnier, Deutsche Bank, and Leerink all slashed their respective price targets. Overall, it's not been a good year for GlaxoSmithKline plc (ADR), which is down nearly 15% in 2014. Not surprisingly, Wall Street is skeptically arrayed toward the stock, with seven "hold" and "strong sell" ratings outweighing just one "strong buy."

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Analyst Downgrades: 3D Systems Corporation, EMC Corporation, and Molycorp Inc

Analysts issued bearish notes on DDD, EMC, and MCP

by 10/23/2014 10:13 AM
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Analysts are downwardly revising their ratings on 3-D printing firm 3D Systems Corporation (NYSE:DDD), IT issue EMC Corporation (NYSE:EMC), and rare earths specialist Molycorp Inc (NYSE:MCP). Here's a quick look at today's bearish brokerage notes on DDD, EMC, and MCP.

  • A dismal quarterly and full-year revenue forecast from DDD sent the shares 15% lower yesterday, and analysts were quick to weigh in with a round of price-target cuts and downgrades. Brean, for example, lowered its outlook for the stock to "hold" from "buy," while Pipar Jaffray slashed its price target by $13 to $37, and underscored its "neutral" rating. More bearish brokerage notes could be on the horizon for a stock that's down 60.5% year-to-date to trade at $36.67. At present, seven out of 16 covering analysts maintain a "strong buy" recommendation toward 3D Systems Corporation, while the average 12-month price target of $52.80 stands at a 44% premium to current trading levels.

  • EMC made a number of headlines yesterday, after reporting worse-than-expected third-quarter earnings, downwardly revising its full-year earnings forecast, and saying it will absorb most of Cisco Systems, Inc.'s (NASDAQ:CSCO) stake in VCE. In the wake of yesterday's busy day, at least four brokerage firms reduced their price targets on the stock, including Pacific Crest, which cut its target by $2 to $30, yet reiterated its "outperform" suggestion. Technically speaking, EMC Corporation has added roughly 9% in 2014 to trade at $27.36, but option traders have taken the bearish route in recent months. In fact, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 50-day put/call volume ratio of 0.35 ranks just 10 percentage points from an annual pessimistic peak.

  • MCP is down 3.1% at $1.27, after Morgan Stanley slashed its price target on the equity by 60% to $1. In addition, the brokerage firm offered up a chilly "underweight" rating. The downbeat analyst attention isn't too surprising, considering Molycorp Inc has surrendered more than three-quarters of its value in 2014. Still, options traders are gambling on even more downside, as the equity's 10-day ISE/CBOE/PHLX put/call volume ratio of 2.50 sits just 1 percentage point shy of an annual peak, pointing to accelerated put buying over call buying during the past two weeks. In addition, short interest makes up roughly 36% of MCP's total available float, and would take more than two weeks to buy back, at the equity's average daily trading volume.

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