Video Game Sector Eyes Critical Summer

Video game stocks have outperformed during stay-at-home orders

May 26, 2020 at 2:13 PM
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Jeff Bezos and his, Inc (NASDAQ:AMZN) empire have their hands in virtually everything, and are showing no signs of letting up. Now, Amazon is eyeing the video game sector, just last week taking a giant step forward with the launch of "Crucible," a free-to-play online game similar to vastly popular, "Fortnite." As the online e-tailer prepares to take a giant bite out of the $120 billion industry, it puts video game stalwart Electronic Arts (EA) in the crosshairs.

During these unprecedented times of social distancing and isolation, video games have moved to the forefront of being a safe outlet for at-home entertainment. According to the first-quarter 2020 Games Market Dynamics U.S. report from The NPD Group, overall total industry consumer spending on video gaming in the U.S. reached a record $10.86 billion, an increase of 9% year-over-year. Advertisers are taking note as well; "Individual games for consoles and computers had the most dramatic increase in ad spend, " writes Ad Age’s Ilyse Liffreing. "Spending by game titles increased by 60 percent, from $10 million in January to $16 million in April." The question now becomes whether this trend persists as lockdowns are lifted, the summer heat hits, and people start to head back outside.

EA is fresh off its May 20 nearly two-year high of $121.76, up 9% in 2020, performing admirably in the face of broad-market pressure. However, that new peak comes amid historically low implied volatility (IV) -- a combination that has not been ideal for the stock in the past. According to modeling from Schaeffer's Senior Quantitative Analyst Rocky White, there have been two other instances in the past five years when the stock was trading within 2% of its 52-week high, while its Schaeffer's Volatility Index (SVI) sat in the 20th annual percentile or lower -- as is the case with EA's current SVI of 31%, which sits in the 19th percentile of its 12-month range.

The data shows that one month after those signals, the video game stock was down 2.1%. That may seem like a minimal pullback, but if one of similar magnitude were to occur a month out, it would put EA below its 20-day moving average, a trendline that has served as firm support since April. Plus, the equity's 14-Day Relative Strength Index (RSI) closed on Thursday at 56 -- on the cusp of overbought territory -- further reinforcing the case EA could be headed for a minor breather on the charts. From a shorter-term perspective, perhaps a wait-and-see approach is viable heading into the holiday-shortened week. Electronic Arts stock also showed up on White’s list of the 25 best stocks on the S&P 500 during the week of Memorial Day. Looking back at the last 10 years, it came away with an average loss of 0.3%.

It will be worth watching the aforementioned trends this summer -- especially with Amazon's presence looming large – to see how video game stocks like EA react. Does the equity succumb to more competition, some technical snags, and a return to normalcy in society? Or is this "new normal" now suggest that video game stocks such as EA are ready to take off on the charts? One way to reconcile all of this uncertainty is with options. Using call options in lieu of buying stock outright allows one to put less dollars at risk relative to equities, while the leverage allows you to achieve the profits you are seeking. Or, you could hedge a long position with puts, allowing macro events to unfold without putting your portfolio at major risk.

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Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, May 24.


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