2 ETFs to Utilize and 2 Fintech Stocks to Watch [VIDEO]

The two ETFs to evaluate before entering a fintech position

CMT, Senior Market Strategist
Nov 12, 2021 at 12:43 PM
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On Tuesday, November 9, Schaeffer's Investment Research's Senior Market Strategist Matthew Timpane, CMT, was a featured presenter at the Benzinga Global Fintech Awards conference. Here is the full recording of Timpane's presentation for your convenience:

 

Full presentation transcript:

Luke Jacobi: Without further ado, I do want to pass it off to a good friend of mine over at Schaeffer's... Matthew Timpane. He's gonna be taking us through a little bit of market education. So you're learning about the tools today and he's gonna be talking about the market itself. Matthew, I'm going to pass it your way, sir.

Matthew Timpane, CMT: All right, wonderful. Thanks, Luke. As he mentioned, my name is Matthew Timpane. I'm a Senior Market Strategist over at Schaeffer's Investment Research. We've been in business now for 40 years, providing options, trade recommendations, news, insights, and free education to retail traders.

You know, I was previously a portfolio manager and a partner at a registered investment advisory firm handling multi asset portfolios. And I moved my way over to Schaeffer's to really challenge myself in the options market, and to dive extremely deep into this area, like so many other retail traders now in the area, you know, I'm here, really, I wanted to be able to help them and be able to provide them with insights that they might not know yet because we have the time, this is what we do every single day. We're going to kind of just quickly go through this presentation here. And if you have any questions, feel free to throw them in the chat.

A Macro-Level View of Current Market Sentiment and Seasonality Trends

First off, we're going to look at a macro backdrop here kind of quickly, and then go into some sentiment and seasonality. And then I'm going to kind of just share some screens, kind of how we do it, how we're a little bit different than some other places. And then I'll throw out some trade ideas that could be coming up. Currently, you know, typically, I'd rather put trade ideas that have potential for the future, then that have already happened. Because you know, the idea is for you to make money as well. So you can watch these levels, see if they hit.

We have the Nasdaq-100 ETF QQQ Trust (QQQ), it's kind of been trading long this whole price channel throughout 2021. Since last year, really. But what really kind of spoke to me recently was we did kind of see it hit resistance level around 400. That is the peak call level for open interest. You know, there's there's a reason why we're starting to pull back here currently, as we've had this massive rally.

I'm not too bearish, as we have seasonal tailwinds at our backside, I've been talking about this from previous conferences and through Twitter, so you can go back and look (@mtimpane). But you know, I'd really be more looking at this for a dip-buying opportunity if we do get a pullback, maybe down to around the $380-370 range. These are, you know where two large put strike open interest levels are setting. And they could act as support.

Now $350 is the peak put currently, which I don't really see us getting all the way there. But you know, things could always change as markets develop. But as of right now that's not an area I would look for, since we do have these seasonal tailwinds in Q4. And heading into the new year, I'd really kind of look for maybe more of a mid pullbacks, that $370-380 range to get a buying opportunity.

Now I'm not saying that we can't continue to melt up here like markets have, I'm just saying it's probably more prudent to take some of your profits off the table right now. And let some of your winners still run until you can see a bonafide breakdown in those securities.

I also placed on here 125-day moving average, which has acted extremely similar to 2014 through 2016 market cycles. So I haven't really seen this do this since then, where major indexes we're finding long term supports around those 125-day moving averages. So it's kind of unique to see that coming back into the markets again. So that would kind of be like an ultimate dip-buying opportunity here on the QQQ going forward. It's also near that lower end of that price channel. And it's something you want to continue to bet on as long as we don't break down.

I always like to kind of zoom out, you know, when looking at securities, because you're able to identify some levels that you might not have noticed before. And then in this particular case, I really want to kind of show how the securities or the QQQ is specifically act around these round century level numbers like $30 and $200, as you can see around the $200 level, you know, we kind of started getting some hesitation a little bit prior to it and then you know, for about a year it took to consolidate around that $200 level between $190 and $200 kind of peeking out as resistance. So it took some time that could be what happens here again.

Now when we did get to the $300 level. It only took about six months to work through that, but it was volatile and we had some great opportunities long and short during those six months, and we're probably entering a similar situation right now, not to say that we can't just break up and move on out and up from $400. But typically, it does have a tendency that it's going to want to consolidate a little bit of these gains, let the market kind of rest a little bit. But you know, you're still going to find good opportunities. So it's nothing to be scared about or anything like that. It's something to look at as an opportunity.

I did leave the 125-week moving average on this chart, just kind of carried over from the daily and honestly, I was amazed myself, it has marked long-term bottoms, since 2015, in the QQQs. So it's something that I'm going to keep on my radar and have set an alert for for when you're looking really kind of how I said, you know, you'll see support and resistance areas that you don't necessarily see, even when trading options when you pull it to the weekly and monthly charts. So it's something if we did for some reason ever gonna move back down there, even though those daily charts, those intraday charts may look just horrible, you might want to be able to place a few of more speculative bets at that time, because you can really kind of see some upside.

Now, why we have been bullish was strictly because the case within the small caps. We talked about this at the small cap conference. So, you know, just quickly touching on this here, you know, we saw that the Russell was kind of going through that typical year-two bull market kind of consolidation phase, where the S&P 500 and the Nasdaq wasn't, but what the small caps were doing was they were consistently finding support at the 200-day moving average. And in past cycles, it's either been the 200-day moving average, or the 320-day moving average have been the optimal buying opportunities for small caps.

And, oddly enough, that $210 to $212 area down there, which was support was also 10%, year to date. And then $232 level, which was kind of resistance throughout the year was +20% year to date level. Now, what got us extremely bullish was, when the divergence finally ended in relative strength that kind of broke out, we knew that we were probably going to break out to the upside. So now what we'd like to see is probably a nice pullback, to test that breakout level. But we'd like to see small caps continue on in the rally continuing going forward.

This is the growth versus value, relative ratio chart, I think it's important to know so that you know where to allocate your funds right now. Growth has actually kept going. So as much as people had concerns about interest rate rises, growth has still been outperforming you know, it went through a consolidation phase throughout the year, as value did have its moments this past year. But growth is back again in the driver's seat, and now has broken off in those late 2020 highs. But one thing about it is I think people are getting over-panicked about the interest rate rises, we are coming off a really relative low basis of interest rates.

And as long as the Fed doesn't do anything crazy, by upping interest rates by a full point to curb inflation, I think growth can still handle quarter point raises and interest rates when those happen possibly here in 2022. So it's not something that should be scaring you away from the growth opportunities, you should be looking at them as buying opportunities because people will panic sell a little bit even on a quarter point raise. And it should be just looking to allocate to the stocks that you want to keep going and holding in your portfolio long term that have high growth outlooks.

Another ratio that I like to use is the high beta versus low volatility. It broke out of this huge 10 -year range we highlighted this last year. But you know, where did it peak out? You know, that's kind of where it kind of stalled out for during 2021. Now we're back above those highs.

So if we are going to continue to have a melt up in the market, you know, I would expect this high beta versus low volatility ratio to hold those that recent breakout. If it doesn't, that can mean that we're going to have like a little bit of a pullback, you know, could just be five 10%. But it'd be a nice little indicator to know what we're probably going within the next couple of weeks to a month.

Evaluating Fintech Trading Opportunities Using ARKF and FINX ETFs

Now, we're at a fintech conference, so we should probably show something to a fintech industry or sector standpoint, so I have pulled out two ETFs that best encompass the sector in itself. We have the ARK Fintech Innovation ETF (ARKF). And while it's not the perfect proxy for fintech in general, because, you know, obviously Cathy Woods makes her selections, but, you know, it's a decent proxy for what we have.

Currently, it's sitting just kind of below that 10% year-to-date level is above the year-to-date anchored VWAP level, but it is still below that peak anchored VWAP level. So it's kind of just coiling right here. It's been holding this trendline throughout the year. So, you know, there's obviously a chance that we can come back down test that year to date break break even level in that lower trendline. But what we'd like to look for, for a bullish activity specifically in fintech is a breakout above that +10% year to date level. And if you're more conservative, you might want to look for a breakout above that 361.8% Fibonacci extension level that came from the pre pandemic highs to the March 2020 lows. You know, that would be around $56. And that would kind of give you a nice conservative and definitive buy signal for you know, the ARK Fintech Innovation ETF.

Probably a little bit better of a proxy would be the Global X FinTech ETF (FINX) as it's a little bit more diversified. Still probably not the perfect kind of industry ETF for fintech in general, I think a lot of things are probably left out. But, you know, it kind of gives us a better idea. It found support recently at year-to-date breakeven, you kind of have this, you know, inverted head and shoulders pattern that it kind of broke out from came back to test those previous highs. And now we're kind of sitting here just above 10%, year-to-date level, right at those highs. So if we break out above $53, it's probably bullish for the whole sector among fintech, it's kind of you know, certain areas have been struggling, certain areas have been extremely hot in the sector, this could kind of broaden the base a little bit if we see this breakout.

 

Options Volume Hits Near All-Time High Record Volume on Friday, Nov. 5

So since we're an options firm here at Schaeffer's, one that kind of just touched on this last Friday, was actually the second largest volume day in terms of total option volume, with over 57 million contracts traded equity volume also set a record that day. But you know, equity put volume was pretty low. So we're seeing a little bit of aggressive call optimism within the market in itself, you know, the previous market high in this, and I do see the line was kind of cut off a little bit here. But the previous market High was in January 27 2021, where we traded over 60 million contracts, trading hands that day.

What does this tell me? This tells me a lot of the retail investors that came in during the pandemic shutdowns haven't left, or the ones that have left maybe blew out some accounts. But the ones that have stayed that have maybe grown their accounts, and they're buying more now. So I think this is really encouraging to the do-it-yourself investors, for the people that are going to be using fintech products, trading themselves, you know, instead of using advisors, nothing wrong with using advisors. But I do think that there is a shift to a lot more investors doing it themselves. And it's totally able to be done. All you got to do is take the opportunity to learn the markets, and you can really do it yourself. This is one of the biggest reasons why I joined Schaeffer's Investment Research -- to help the retail investors just do it themselves.

So another thing that we kind of do that's maybe a little bit different than other places is we look at put/call volume ratios in unique ways. The NASDAQ-100 components is for the buy-to-open put/call volume ratio. So what we're doing is we're actually looking at the components not the index itself. They are coming off a seven year low, or they ripped up to 17-month high. And now they have obviously come back the close yesterday around .433.

This has been a great indicator of marking short term tops and bottoms. And we what we really look for is we look for inflection points. So yes, we might be starting to round out right now. But we haven't seen an uptick yet. So that's why I haven't looked at it as you know, we're in a bearish predicament just yet, we could continue to see a melt up here. It could might not be over with because we haven't seen this uptick yet in the put/call volume ratio. This is something that you can find quite often on our site, through our Monday Morning Outlook, or sometimes even in our Indicator of the Week, which I'll actually probably talk about here in a little bit. So, you know, take a look out there, we're always trying to provide some insights to the retail traders.

Like I said, we do some things that are unique. So we take a basically a FAANG put/call volume ratio of the FAANG securities here. So we see that the combined ratio tumbled recently 2.367 after yesterday's close it's so it's well off of its recent peak that still has lower it could push if the market wants to continue higher. But we are getting down towards the lower end of those ranges. So that's why we're a little bit more cautious here.

And then finally, you know, we created this MEME index put/call volume ratio with about 20 different securities. And it's got things like AMC, GameStop, Palantir, Robinhood, you know, etc. In this, there is a lot of call bias in these meme names right now. But what really kind of stood out to me about this was I thought this was going to be the best indicator for marking tops and bottoms. It tells me that it really isn't. What it is, is it's encouraging, this ratio doesn't really mark those tops and bottoms well, and that tells me that these long premium buyers are more sophisticated than past retail generations. So we can see here that they've actually had huge put volume near market tops, and more call volume near near market bottoms at times. It's about 50/50 right now. But to me, that's extremely encouraging for the retail investor that, you know, they're not always on the losing end of the trades here against institutions anymore.

Positive Seasonal Tailwinds Continue Into Year-End

 

On to seasonality. This came out last week in our Indicator of the Week, that our Quantitative Analyst, Rocky White, writes every week. And I thought it was interesting to follow up on some of the seasonality stuff I've been putting out there for the past month, month and a half. Because it's really showing you what happens to the S&P 500 when it's up 20% through October. As you can see, it's not really a condition for an overbought market. It's actually a condition that says Q4 is going to be probably better than typical years.

We had eight returns previously, before the ninth year being put in this year with 20%. So of those eight years, the average return was 6.23%. Now that's against every other year, which averaged 2.84% since 1950. So that's a solid 3.5% difference between the other years and this type of year. So we still have these positive seasonal tailwinds, even though November's already been super great. We're gonna want to continue to look for buying opportunities as we continue to head into year end.

So using the least-squares method, what we wanted to do here was we want to look at the last 10 years of the most familiar chart path. You know, that way, you're not just getting things 20% or better, we're trying to look at something that is very similar to the trajectory that we've been on this past year. And again, this came from the Indicator of the Week. And the most similar year was 2013. And that went on to gain 5.13%. But as you can see, the average gain is 4.13%. And that beats the average return of all other years since 1950, which is 3.08%. So even though it's it's not extreme, it's still 1% better than previous years.

This is fourth quarter by seasonality, and we've kind of broke it down into industries. I've showed this in previous conferences, so I'm not going to touch on too much. Sectors and industries that still stand out to me are industrials and financials. Financials haven't actually had their seasonal drift that they typically do in November, they've actually been negative on the month, whereas they're usually fairly positive. So those are areas I would probably stick with.

Tech still does well through fourth quarter. But the big thing that stood out to me was alternative energy. And, you know, we've seen massive rallies in that. Now that is at the bottom of the of the list. Because the percent positive is the lowest. But when it does rally, it rallies harder than anything else. So we actually had one of those years where alternative energy is just skyrocketing in the fourth quarter, even though it's typically not the greatest quarter for it.

So how do we do this? Well, we do a few different things here. We have moving averages that we quantify and we look for significance within the last three years. But then, since we compile all the option data, what we're looking to do is answer how is this going to affect the past call and put returns? So we're able to mark what what moving averages have provided some significance, and then we're able to go back and look at those returns so that we can quantify this and give us an edge.

This also kind of tells us what might not be a good buying opportunity, too. So even though the chart may look really good if we're seeing something like you know MetLife insurance here, where the expected call return is -79% on 10-days and -100%. You know, we might not want to Take that opportunity on a call trade. Now MetLife probably isn't a trade that we're going to take, because it's not usually as volatile. But it's a good example.

Another good example is Boeing just from the other day. Yesterday, I believe Boeing was trading around $227 and failed. Now it's down around $221. Well, what was our bearish filter, saying on yesterday's screen, was saying what's Boeing reaches 120-day moving average, we know it has a tendency to fail there. And then the expected put return was 180%, on a 10-day and 295%, on a 21-day, then you're not going to get that necessarily, but we have the odds in your favor, which we feel that gives us a little bit of an edge. Unless things are fundamentally changing the characteristic of the stock, we can understand it a little bit better than a lot of people out there.

Looking at Options Data Using the Schaeffer's Edge

This is probably probably one of my favorite screens. Stocks trading near their last significant call strike, or near their peak call strike. And the reason for this is peak levels can be resistance. And then if you break through those peak levels, you can have those gamma squeezes where you get those +10% moves in the stock, +20% moves on the stock. And the thing just keep squeezing.

So that's exactly kind of how we use it. One security that I noticed on here was Hut 8 Mining (HUT). I believe HUT did break through its strike price yesterday. And that's why you kind of see it continue to squeeze. We might be seeing it pullback today, I believe, when I was looking at it earlier.

But these are the types of things that we look at, they're a little bit different. So we're constantly trying to find things that are trading near these levels so that we can play puts, or if they break out and break through them, we can get in on that squeeze.

Conversely, you can use that for put strikes as well as support or as a potential Delta hedge sell opportunity. This is where you get those flushes. So if you do break through that put peak put support level, we often get those flushes where you can see a 10-20% move very quickly to the downside.

This is something relatively new that we just started doing over at Schaeffer's. We've always looked at 10-day buy-to-open ratios and put-call volume in 50 days. But we've quantified the data now and how it's acting when they're within a certain percentile basis, meet certain other objectives. So this is actually something that has piqued my interest. I was looking at it earlier today. Redfin (RDFN) is, you know, and I almost put it on here for a trade idea. But you know, it's sitting in its 96th percentile currently. But what what does it do when it's in its 90th percentile over the past year, is actually outperformed, and it's on average risen by 17.83% for Redfin stock. So that's a candidate for a long call option in our eyes.

And then we also do it with the 50-day. The 50-day might be when we're looking at it not from a short term standpoint, but from a little bit longer term standpoint, making a call option. And then we also do this with called puts as well. So conversely, we can do this with call puts, and then look for downside, potential candidates that we can, you know, long some put strikes on.

Another thing that we kind of like to use is the low IV/high price here, what we're looking for is things that are trading near their 52-week high that have relatively low implied volatilities, and then we're looking for the signals. So we're seeing how many times has this signal in the past, you know, we're not seeing this, you know, you're not going to get signals of like 20-30% returns, because we're only looking for like, recent signals. But you know, once you get past three to four, you got some solid signals here, and how this momentum keeps carrying the stock prices. So these are the types of things that we're constantly looking for.

And then we also combine it with our Volatility Scorecard here, which I'm going to talk about next. Our Schaeffer's Volatility Scorecard (SVS) is something that we've shown here plenty of times here on Benzinga. We update this weekly right on our website, you can go to to I believe market news and go in there and volatility scorecard, it's going to give you the top volatility scorecards that we publish each week on Monday. Really, I'm not going to go into this too deep because it can get a little bit complex but, in simple terms, tells us how often a security of those underlying options have historically had underpriced or overpriced options based on their ranking. And then we rank against all other securities as well with actual universe. We show typically from level 100, down to about 80. But if the list is too long, I think like this week, the volatility scorecard took tickers from 100 down to about 95. But so feel free to go up there check them out weekly. They usually provide you some some good option trading ideas.

Keep an Eye on Square Stock and Palantir Stock Levels

So on to the trade ideas. We have two of them here for you today. Square (SQ) as recently You know, not the greatest earnings reaction, it's trading lower and sympathy with PayPal as well. But there is a chance that we could be approaching an area where SQ is tradable. We're approaching this lower trendline in a symmetrical triangle, it's kind of almost even flag-ish. If you kind of look at it from this lower point down here. Year-to-date breakeven is around $221. So this area could easily hold. What we could see as possibly maybe a break down and then a quick snap back. Or we could just maybe hold this area. So it's something I'd be looking for.

The Volatility Scorecard on Square stock is 71. SQ options are priced in the 21st percentile. And the buy-to-open 50-day put/call volume ratio is in the 84th percentile, with short interest percentage of float at 8.41% and rolling over from year-to-date highs. So there is some negative sentiment building up on Square. And that usually is what we're looking for, to produce the most bang for our buck on call options. Also, the second largest put open interest is at this 220-strike level. So peak call and peak put are alternatively right now at 250-strike. So you might have some upside gains capped. But if you did get this pushed on that 220-level, it's probably worth the gamble to take a shot on this on the long side.

Palantir Technologies Inc (NYSE:PLTR) stock just reported and is not trading very well. But you know, it could be a short term put strategy here down to some of these levels. You could have year-to-date, if this breaks down right here, year-to-date, breakeven, you could target on a short term basis, or even coming down here to this $21 level, which is -10%. But in the longer term, I'm definitely more bullish on this. So and watch out for the fakeout. You know, currently it's oversaturated in calls, which is the reason why we're probably getting a really adverse reaction here as well. But, you know, oddly enough, where did it stop at today? It stopped that it's IPO-anchored VWAP position.

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