Mark Fightmaster (mfightmaster@sir-inc.com)
8/30/2006 2:24:42 PM
A daily feature available on SchaeffersResearch.com is "Options Update." Every day, we'll give a brief market overview and focus on one stock that is the center of some heavy option trading. The focus of today's feature is Pfizer.
The Commerce Department stepped up early this morning and reported that the U.S. economy was stronger than originally believed in the first half of the year, growing by 5.6 percent. The real gross domestic product (GDP) for the second quarter was revised to 2.9 percent annualized, up from the earlier estimate of 2.5 percent. Additionally, key inflation data were revised lower. The closely Fed-monitored core inflation measure increased 2.8 percent in the second quarter, down from the earlier-reported 2.9 percent. On a year-over-year basis, change was unrevised at 2.3 percent, which is above the Fed's target of one-to-two percent. This is the largest increase in core prices in 11 years.
GDP aside, it is possible that the biggest news this morning once again occurred in the oil patch. The Energy Department reported that crude supplies increased 2.4 million barrels to 332.8 million for the week ended August 25. Analysts expected a decline in crude supplies. For a second-straight week, motor gasoline inventories rose, adding 400,000 barrels to total 206.2 million barrels. Distillate supplies increased by 1.3 million barrels to 136.8 million. According to the American Petroleum Institute (API) crude inventories increased by 3.5 million barrels and now stand at 337.1 million barrels. Immediately after the inventory report, the per-barrel crude price dropped to $68.90, which is the lowest price since the last day of March. However, at last check a barrel of crude cost $70.10, a gain 39 cents.
Initially, the GDP and crude inventory data were the one-two punch that the market needed; however, the major market indices have backed off a bit and are currently trading near the break-even level.
Most-Active Options Update
At 2:34 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA – 11,373.4) has edged 0.02 percent higher. The S&P 500 Index (SPX – 1,303.76) is 0.04 percent lower, and the Nasdaq Composite (COMP – 2,180.9) has added 0.39 percent. At 3:35 p.m. Eastern Time, 2,368,861 calls have changed hands compared to 1,983,353 puts, equaling a single-day put/call volume ratio of 0.83. The CBOE's equity put/call volume ratio stands at 0.99, while the ISE's ratio comes in at 0.69.
Option Activity Follow-Up
Yesterday's, focus was on General Electric
(GE:
sentiment,
chart,
options)
, with the crux of the examination on the 35 level and the stock's future ability or inability to break through its resistance. It appears that today's small rally isn't going to even challenge the 35 level. Remember that this level is the site of peak call open interest, which will make the road higher significantly more difficult. If the shares mount an offensive on this level, a rejection could be a major blow.
Pfizer
Today, we will take a look at the pfunnily spelled pfarmaceutical pfirm, Pfizer
(PFE:
sentiment,
chart,
options)
. Today, PFE finds its way onto our notably active puts list, thanks to heavy activity on both its March 2007 25.00 contract (PFEOE) and its December 25.00 contract (PFEXE). Digging around a bit for news, I found that a Norwegian court decided that Ranbaxy's generic version of PFE's Lipitor does not infringe on two of PFE's patents in the country. PFE has already stated that it will appeal the decision, adding that the decision has "no practical effect" on its ability to protect Lipitor (used to lower cholesterol) from the launch of Ranbaxy's generic competitor. The firm seems to have shaken off this news, as it is currently higher by nearly one percent.
Technically, this Dow Jones component has started to rally. On a daily basis, the stock has added roughly 26 percent since the middle of July. During this run higher, the equity has relied on the support of its 10-day moving average. Since July 18, the shares have finished below this trendline merely once. This support helped PFE take out resistance at the 27.50 level, which is the site of peak put open interest in the front three-month options series. Combine this potential options-related support with the stock's ascending 10-day moving average, and it may be difficult for PFE to drop below 27.50.
Turning to a weekly chart of PFE shows exactly how long it has struggled with the 27.50 level. Since the beginning of July 2005, the equity has managed to close above this resistance one other time. The way this week is shaping up, we may be adding a second week to that statistic. Furthermore, the shares have pulled their 10-week moving average into a bullish cross of its 20-week counterpart. This technical formation often hints that there is further upside ahead.
So, other than my bum knee, why am I not running around the Schaeffer's trading floor screaming about the bullish potential for PFE? Well, its long-term performance doesn't warrant such action . . . plus I may hurt someone else in the act. In fact, since its April 1999 high of 50.04, PFE has dropped 44 percent. That's strike one against PFE. Strike two against the stock is that it could be hitting the top rail of a trading range. However, that's only two strikes, and it seems that PFE may have a bit of life left. The shares have advanced through potential resistance at its 10-month and 20-month moving averages, which could both now act as support. I would set the 28 level as the benchmark here, if PFE breaks through its resistance, the stock could regain its past success. However, a rejection at this level could be devastating.
Another reason I am not overly bullish on PFE is the fact that it receives a healthy amount of optimism from the analyst community. According to Zacks, the pill producer receives nine "strong buys," two "buys," seven "holds," and one "strong sell." The problem here is that a downgrade from any of the nine "strong buys" could exert quite a bit of downside pressure on PFE. This potential downside pressure is a bit disconcerting, as there is little in the way of potential short-covering support to help provide a springboard for the stock.
On the other hand, the speculative options crowd is tilted to the bearish side when it comes to PFE. The company's Schaeffer's put/call open interest ratio (SOIR) of 0.78 is higher than 75 percent of those taken during the past 52 weeks. This pessimism could unwind and turn into buying pressure, which could push the stock higher.
In PFE, we are presented a stock that has some upside potential, but has little in the way of sentiment to help push it higher. Is this a non-committal outlook? Yes, but if pressed, I would look at PFE bullishly. This is an outlook shared by our Schaeffer's Equity Scorecard, which ranks PFE a 6.0 out of a possible 10. If PFE slips a bit, but doesn't breach support, we could see further pessimism from the Street, which would make PFE a more attractive contrarian play.
** The tables below reference notably active call and put contracts across all six exchanges.**
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