2 Developments From the 2022 Correction

Small-cap put buying has been on the rise again

Managing Editor
Jan 28, 2022 at 10:45 AM
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In stockpiling ideas for this space in the last week, two very different concepts stood out amid the carnage that has been 2022 so far. Instead of picking just one, why not explore both separately, since their pertinence to the 2022 selloff seems too good for one to find the scrap heap.

First up we have the curious case of Ford Motor Company (NYSE:F), which is on track for a 17% haircut this week, its worst since April 2020. On Thursday, Jan. 13, Schaeffer's Senior Market Strategist Chris Prybal noted that Ford's market cap crossed the psychologically-significant $100 billion market cap level. Fast forward one week, and per Prybal's table below, you can see F's market cap has slunk back down to $86 billion.

Market Cap COTW

At the height of the auto crisis, Ford's market cap bottomed in 2008/2009 at $10 billion. Shorter term, F's trough during the Covid-19 bottom of 2020 came in at $20 billion. So last week, Ford was turned away at a level that was 10 times its all-time bottom, and five times its Covid lows. This is by no means a bearish indictment against Ford stock, which is up 84% year-over-year and has become the face of the "value stock" renaissance in the last three months. In a not-so-subtle reminder of scale, Tesla's (TSLA) market cap has pulled back to the $1 trillion level, one-tenth of what Ford's was at $100 billion. It's a context clue that should frame Ford's reality as a value stock and serve as a stark reminder to investors that it does not possess the flashiness of growth stocks.

When founder and CEO Bernie Schaeffer sends an email and the first sentence is "this may well be the ugliest daily index ETF chart ever", you pay attention. The one-year chart below of the iShares Russell 200 ETF's (IWM) is from Wednesday, Jan. 19. The 'ugliness' implied by Bernie does not denote bearish implications, and instead refers to the "results of any attempts over the past year to trade IWM directionally, over time periods of longer than 2 weeks."

IWM Year-over-Year COTW

Bernie highlighted the $200.21 area that, equates to the -10% year-to-date level, and appears to be the round-level number that IWM will settle at this week. With the IWM heading toward its worst week since October 2020, the small-cap ETF was last seen at $201.58, and earlier traded as low as $197.60. Going forward, $200 will certainly be one to watch, not so much as a directional indicator, Bernie noted, but more as a guide to mean reversion.

How have options traders reacted? Per another chart from Prybal, you can see the 10-day buy-to-open put call ratio barreling past the 0.5 level to start 2022, an area that turned away previous spikes in put trading the last 12 months. More recently, after a sharp drop-off, the ratio is on the climb again, last seen at 0.39. This is a clue that put traders' ears are perking up amid the recent broad market messiness, and adds to the growing signs that a long overdue correction could be forthcoming.

IWM cotw jan 21

There is virtually zero connective tissue between Ford's market cap situation and IWM's pullback levels. But separately, both F and IWM have been darlings of the last nine months, so their reaction to the broad market correction can be a useful tool for an investor looking for a something in the playbook to help manage the stark selloff.

Subscribers to Chart of the Week received this commentary on Sunday, January 24.


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