Schaeffer's Trading Floor Blog

Is the VIX Staring at a Turkey Coma?

A look at the CBOE Volatility Index (VIX) ahead of Thanksgiving week

by 11/21/2014 10:10 AM
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Index volatility has two distinct drivers. One is the volatility of the component stock. The other is the degree to which those component stocks correlate to one another. If correlation is strong, volatility rises -- it essentially compounds moves in individual names. Conversely, if correlation drops, index volatility drops as the moves in individual names offset each other.

Well, it looks like we're seeing a bit of the latter lately, as per this from Bloomberg:

The Chicago Board Options Exchange's S&P 500 Implied Correlation Index has dropped a record 30 percent in November. The gauge, which uses options to measure expectations about whether Standard & Poor's 500 Index stocks will move in unison, touched the lowest level since the index was created in January 2012.

… Implied correlation in S&P 500 Index stocks has plunged 48 percent since reaching a 22-month high Oct. 15, the last day of a 9.8 percent drop in the benchmark equity index spurred by concerns of slowing growth overseas.

One quick note about the CBOE correlation indices: They don't maintain constant durations, so sometimes comparing a reading from one moment in time to another can produce an apples-to-oranges sort of comparison. But having said that, the conclusion of the piece is absolutely correct.

As the author notes, that's all good news for fund managers. If everything moves in lockstep, who needs anything other than an index? But if names are moving to their own drummer, it gives the opportunity at least to find winners (and losers). It's a stock picker's market, baby!

Of course, the flip side is that it's a terrible setup for volatility and, ergo, options traders. Think of volatility as essentially the pool of available profits in the options world.

Ten-day realized volatility (RV) in S&P 500 Index (SPX) sits at 3.1 now. CBOE Volatility Index (VIX) is still near 14, so the well hasn't completely gone dry -- but that's an unsustainable relationship over time. Either RV has to lift or VIX has to drift. Or, most likely, they trend toward each other. Thus, correlation likely increases and implied volatility decreases.

Don't look for much in the way of reversion next week though. It's basically a 2.5-day trading week with a 4.5-day weekend. Throw in the "regular" weekend and you have a few slow trading days amid 10 calendar days coming up, all within a 3.1 RV backdrop. No one is paying up for time heading into that. So, we very likely see a holiday-induced VIX drop -- the question is whether it stays in its turkey coma after the break.

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


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Analyst Update: Google Inc, King Digital Entertainment PLC, and Vipshop Holdings Ltd ADR

Analysts adjusted their ratings on GOOGL, KING, and VIPS

by 11/20/2014 1:55 PM
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Analysts are weighing in today on Internet powerhouse Google Inc (NASDAQ:GOOGL), "Candy Crush" parent King Digital Entertainment PLC (NYSE:KING), and China-based e-retailer Vipshop Holdings Ltd - ADR (NYSE:VIPS). Here's a quick look at today's brokerage notes on GOOGL, KING, and VIPS.

  • GOOGL is off 0.7% to trade at $543.22, following a price-target cut to $722 from $723 at Credit Suisse, which nevertheless underscored its "outperform" rating. On the news front, the company reached a patent-litigation settlement with Rockstar, but is officially out as Mozilla Firefox's default search engine. Year-to-date, shares of Google Inc are down more than 3%, and have underperformed the broader S&P 500 Index (SPX) by roughly 10 percentage points during the past two months. Nonetheless, the brokerage crowd is very bullish toward the stock. Twenty-seven out of 31 analysts tracking GOOGL have given it a "buy" or better rating, and the stock's consensus 12-month price target of $650.05 stands at a 20% premium to the current share price -- and in uncharted waters. In other words, the security could be on the verge of additional bearish brokerage notes, which could result in headwinds.

  • KING is rallying on a price-target hike to $16 from $13 at Deutsche Bank -- though the firm held on to its "hold" opinion. At last check, the equity was 3.8% higher at $16.55, and has topped the SPX by 32.6 percentage points during the past 20 days. During the most recent reporting period, short interest fell nearly 10%, which may account for some of King Digital Entertainment PLC's recent gains. However, 22.5% of the stock's float is still dedicated to short interest, and would take roughly three weeks to buy back, at typical daily trading levels. In other words, there's plenty of sideline cash available to keep propelling KING up the charts.

  • VIPS has added 1.2% this afternoon to hover near $22.71, after Macquarie -- which underscored an "outperform" assessment on the shares -- upped its price target by $1 to $28. On the flip side, HSBC slashed its target to $24 from $27.70, and downgraded the equity to "neutral" from "overweight," following yesterday's poorly received earnings report. Meanwhile, Vipshop Holdings Ltd - ADR has been flying up the charts, adding more than 170% year-to-date. Not surprisingly, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have blazed a bullish trail toward the equity. VIPS' 10-day call/put volume ratio across these three exchanges is 2.76, higher than 96% of comparable readings from the past year.

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Stocks On the Move: Activision Blizzard, Inc., Cyberonics, Inc., and Liquidity Services, Inc.

ATVI, CYBX, and LQDT are moving sharply in Thursday's trading

by 11/20/2014 11:59 AM
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Around midday, three of the top market movers are video game maker Activision Blizzard, Inc. (NASDAQ:ATVI), medical device company Cyberonics, Inc. (NASDAQ:CYBX), and online auction house Liquidity Services, Inc. (NASDAQ:LQDT). Here's a quick roundup of how ATVI, CYBX, and LQDT are performing on the charts so far.

  • ATVI spiked out of the gate, and at last check, was 6.5% higher at $20.83. Boosting the shares is a $275 million settlement the company reached with shareholders who opposed a 2013 stock buyback from Vivendi SA. Longer term, Activision Blizzard, Inc. is now sitting on a year-to-date advance of roughly 17%. Meanwhile, on Wall Street, there's plenty of optimism flowing toward the security. All 18 brokerage firms covering ATVI rate it a "buy" or better, and its consensus 12-month price target of $26.05 stands in record-high territory.

  • CYBX dropped to an annual low of $48.19 out of the gate, but promptly rebounded to the tune of a 13.2% intraday lead to trade at $54.91. This follows news of a fiscal second-quarter earnings beat, as well as a 1.3-million-share repurchase initiative. This is likely music to the ears of short-term traders. Cyberonics, Inc.'s Schaeffer's put/call open interest ratio (SOIR) of 0.18 indicates call open interest is more than five times put open interest among options expiring in the next three months. What's more, this SOIR rests just 2 percentage points shy of a 12-month low, suggesting a stronger-than-usual preference for short-term calls over puts.

  • Unlike CYBX, LQDT is plummeting on the heels of its earnings report, as the firm posted lackluster quarterly numbers. Specifically, the shares are down nearly 10% at $10.39 -- and earlier hit a four-year low of $10.28 -- bringing their cumulative 2014 deficit to 54%. Meanwhile, negativity is brimming toward Liquidity Services, Inc. across Wall Street. The stock's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 4.24 ranks in the 70th percentile of its annual range. What's more, 13% of LQDT's float is sold short, representing more than two weeks' worth of pent-up buying demand, at typical daily trading levels.

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Analyst Downgrades: 3D Systems Corporation, Chevron Corporation, and Deere & Company

Analysts downwardly revised their ratings on DDD, CVX, and DE

by 11/20/2014 9:29 AM
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Analysts are weighing in today on 3-D printing specialist 3D Systems Corporation (NYSE:DDD), oil-and-gas issue Chevron Corporation (NYSE:CVX), and farm equipment firm Deere & Company (NYSE:DE). Here's a quick roundup of today's bearish brokerage notes on DDD, CVX, and DE.

  • Jefferies cut its price target on DDD to $42, but underscored its "buy" rating. It's been a dreary 2014 for DDD shareholders, with the stock shedding more than 61% of its value year-to-date to churn at $36.04. In spite of this downward trajectory, there are still pockets of optimism lingering on the Street. Six out of 17 covering analysts maintain a "strong buy" recommendation, and the consensus 12-month price target of $46.30 sits at a 28.5% premium to current trading levels -- and in territory not charted since late September. Should 3D Systems Corporation extend its downward trajectory, another round of bearish brokerage notes may be on the horizon, which could translate into a fresh wave of selling pressure.

  • HSBC weighed in on a number of energy names today, and for CVX, this meant a price-target reduction to $131 from $140, and a reiterated "overweight" rating. On the charts, the stock has sold off with a number of its sector peers in recent months, and since hitting a record high of $135.10 in late July, shares of CVX are down nearly 14% to trade at $116.47. Against this backdrop, option bears have been active, as evidenced by the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.22, which ranks in the 93rd percentile of its annual range. In other words, puts have been bought to open over calls with more rapidity just 7% of the time within the past year.

  • Ahead of next Wednesday morning's fiscal fourth-quarter earnings report, DE saw its price target cut to $78 from $83 at BMO, with the brokerage firm underscoring its tepid "market perform" rating. Technically speaking, the stock has given back 5.5% this year to trade at $86.33, but appears to have found a foothold atop its 120-day moving average, currently located at $86.19. Traders, meanwhile, have shown a distinct bearish bias toward Deere & Company. In the options pits, the equity's 10-day ISE/CBOE/PHLX put/call volume ratio of 5.40 ranks higher than 97% of similar readings taken during the past year. Elsewhere, short interest jumped 5.7% over the last two reporting periods, and now accounts for a lofty 11.2% of the security's available float. What's more, it would take two weeks to cover these bearish bets, at average daily trading levels.

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Buzz Stocks: Keurig Green Mountain Inc, Best Buy Co Inc, and General Motors Company

Today's stocks to watch in the news include GMCR, BBY, and GM

by 11/20/2014 9:28 AM
Stocks quoted in this article:

U.S. stocks are following their European counterparts into the red, as Wall Street stares at a packed economic calendar. Among the equities in focus are coffee king Keurig Green Mountain Inc (NASDAQ:GMCR), electronics retailer Best Buy Co Inc (NYSE:BBY), and beleaguered automaker General Motors Company (NYSE:GM).

  • Although GMCR topped analysts' fiscal fourth-quarter earnings and revenue estimates, and upped its quarterly dividend, the stock is pointed lower as traders pan a weaker-than-expected current-quarter outlook and news that Chief Financial Officer Frances Rathke is departing next year. Specifically, GMCR -- which settled at $153.95 on Wednesday -- is headed for a 2.4% drop out of the gate. From a longer-term perspective, the equity has more than doubled in 2014, and tagged an all-time acme of $158.87 on Tuesday. In the options pits, speculators are likely celebrating the earnings reaction, as long puts have grown increasingly popular on Keurig Green Mountain Inc in recent weeks.

  • BBY, on the other hand, is set to surge 6.9% at the open, as speculators applaud a stronger-than-anticipated third-quarter earnings report. In 2014, the shares of Best Buy Co Inc have slowly attempted to fill a major bear gap from mid-January, and today's expected jump could be what the doctor ordered, as BBY is set to explore territory north of $37 for the first time in 10 months. Meanwhile, a short-squeeze situation could add fuel to the stock's fire, as short interest represents more than a week's worth of pent-up buying demand, at BBY's average pace of trading. On Wednesday, BBY closed at $35.54.

  • GM -- which settled at $32.15 yesterday -- is bracing for a 1% dip at the open. Weighing on the shares is the latest chapter in the recall saga, with the state of Arizona suing the company for $3 billion, alleging General Motors Company endangered the public and intentionally misled consumers about faulty ignition switches that have since been linked to no fewer than 33 deaths. Technically speaking, GM has surrendered 21.3% of its value year-to-date, and has underperformed the broader S&P 500 Index (SPX) by roughly 10 percentage points during the past three months. Still, seven out of 12 analysts maintain "buy" or better opinions -- leaving the door wide open for potential downgrades to exacerbate selling pressure on the shares.

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