Stocks continued to march higher into July expiration, as the Nasdaq 100 Index (NDX – 14,826.09) closed higher for the eighth-straight week, making it the seventh time this has happened since 2000. A consolidation phase or pullback immediately followed 71.4% of the time, but even when it remained positive, stocks typically stumbled within the next two months.

This is just one of the many things telling me this rally is getting near the later innings in terms of short- to intermediate-term trends. And while any good trader knows you can’t fight price action, it is only prudent to highlight these concerns, so that we are ready to make moves if price action deteriorates before market internals and sentiment readings turn around in the bull’s favor.

Earlier this week, I highlighted on Twitter that the Invesco QQQ Trust Series (QQQ – 361.01) broke above the 261.8% Fibonacci extension level from the pre-pandemic highs to the pandemic selloff lows. At both the 100% retracement and the 161.8% extension levels, we saw prices exceed the level only to stumble for a few months shortly afterwards. I expect the 261.8% level will act similarly and be an important pivot point.

While both the S&P 500 Index (SPX – 4,369.55) and Nasdaq Composite (IXIC – 14,701.92) closed at new weekly highs, these market indices are being pushed upwards from an increasingly narrow breadth. Only a few things can happen in these situations: Either prices fall, consolidate, or breadth catches up. Divergences can last quite a while, but they cannot go on forever, and markets eventually revert to the mean one way or another. Our job as traders is to know what to look for, and how to react accordingly.

The first breadth concern that I see is that the  percentage of S&P 500 stocks that are above the 50-day moving average remains low, with only 56.11% of stocks in the index trading above it. In fact, it has remained low since rolling over from the most recent high in April. This is eerily similar to the type of price action we saw in 2015, before the market entered a two-year consolidation phase.

What has me most concerned, though, is that neither the New York Stock Exchange (NYSE) nor the Nasdaq’s Advance-Decline Lines (ADL) have broken out. While the Nasdaq ADL was able to break out of a downtrend that helped propel the index to test resistance, it did not follow through and break out like the index. This is also similar to what we saw in 2015, before equity markets went sideways and frustrated bulls for the next two years.

Additional evidence that we are experiencing breadth issues that could trip up equities is the S&P 500 Equal-Weight/S&P 500 relative ratio chart. It has now rolled over from the June peak, where it found resistance around the 2013 and 2019 lows. And while many will point out that we had a prolonged period from 2016 to pre-pandemic 2020 where mega-caps and large-caps (predominantly tech stocks) led the markets higher, that is not typical. Throughout history, you need participation from the majority of stocks for rallies to persist.   

On a positive note, though, we’ve seen multiple sectors and industry breakouts. As I’ve been highlighting on Twitter lately, we want to watch these breakouts closely. Sectors or industries that hold these levels, if we simply enter a consolidation phase, will very likely be the market leaders going forward. However, failures at these levels can lead to fast moves to the downside.

"…With the Cboe Volatility Index (VIX -- 15.62) coming into a new week and quarter around 15 – which was its reading ahead of the early 2020 Covid-19 sharp selloff, and a level from which it has bounced in recent months – a hedge of long positions to protect against mid-summer and/or late-summer surprises could be appropriate."

- Monday Morning Outlook, June 28, 2021

As we mentioned a few weeks ago, the Cboe Volatility Index (VIX – 16.80) had the potential to bounce around 15, which was the reading ahead of the 2020 pandemic selloff. The VIX spot surged on Thursday to a high of 21.29, as stocks sold off only to find resistance near the 2020 and early 2021 low levels, as it did throughout the second quarter this year. I suspect a sustained move above those levels will also come with a change in market behavior as we head into a more volatile part of the summer.

"In a week’s time, the SPX was teetering on a deteriorating technical backdrop, then rallied to take out various potential resistance levels, most notably its early May, all-time closing high. As I said a few weeks ago, if the SPX spends most of its time within the upward channel that began to take shape at the same time positive Covid-19 headlines were emerging, it would be considered a win for bulls, since support and resistance levels that make up this channel move higher with each passing day."

- Monday Morning Outlook, June 28, 2021

As we move into expiration week, it would be irresponsible not to look at open interest configurations. When looking at the SPDR S&P 500 ETF Trust (SPY – 435.52) we have peak call at the 440-strike, and peak put at the 420-strike to start the week. I reckon the market will likely be stuck in this range throughout the week, as this configuration also aligns well with the price channel it has been trading in throughout 2021, which we’ve highlighted numerous times before. If for some odd reason we were to break the 420-strike, it could see a swift move lower to the 405-strike or even 400-strike, but the probability of that happening is low. And while the QQQ doesn’t have a significant peak call level to act as resistance, it does have a massive peak put level at the 340-strike level that should act as support.

As for why I think we will stay range bound, over the past 10 years the S&P 500 has been positive in July 90% of the time, with mid-July being one of the best performing two-week periods for the index. Furthermore, over the past 20 years July has been positive 70% of the time, and the two mid-July, two-week periods on average have traded sideways.

Much like breadth, sentiment readings tell us that market participants are overly optimistic. The NDX buy-to-open put/call volume ratio just put in a seven-year low last week at 0.354, which was the lowest reading since July 8, 2014. What this is telling us is that we are in a higher-risk environment, as we are prone to a pullback. What people often fail to understand when looking at put/call levels is that we usually want to see a confluence of changes before making bearish bets outright. Two things we are looking for in particular is a rotation upwards from an absolute low, and a subsequent technical level breakdown in broad indices.  

As I have outlined, many factors are telling us we are possibly near the end of the current rally in stocks on a short- to intermediate-term basis. Market participants should take this opportunity to sell any overweight positions into OPEX and pair back their market exposure as risk levels continue to rise. Alternatively, you can hedge or choose to replace long stock positions with call positions to reduce your overall dollar exposure to the market.

Continue reading:

• The Week Ahead: Bank Stocks Kick Off Another Earnings Season
• Indicator of the Week: Is the S&P 500 Pacing for Bigger Gains in the 2nd Half of 2021?

Plenty of red-hot economic activity are due out this week and another earnings season slowly begins to roll out, with bank stocks some of the first to release quarterly reports. Earnings from bank names JPMorgan Chase (JPM), Bank of America (BAC), PNC (PNC), Morgan Stanley (MS), and Wells Fargo (WFC) are all due out this week, while Wall Street can also expect reports from PepsiCo (PEP), Delta Air Lines (DAL), and United Health (UNH). While the week starts slow today, by Thursday there will be plenty of economic data to digest, including a monthly report from the Organization of Petroleum Exporting Countries (OPEC), manufacturing data, and weekly jobless claims. This week will be rounded out with data on retail sales and business inventories. 

The economic calendar is bare today.

No companies are slated to release quarterly earnings today, July 12.

Looking ahead to tomorrow, activity will pick up on Tuesday with the core consumer price index (CPI), and the Federal budget balance set for release. 

All economic dates listed here are tentative and subject to change.

** Schaeffer's Event Trader portfolio has doubled in value (+109.72%, to be exact) over the past six months by simply putting 10% of its portfolio into each simple put or call purchase recommended in the program! Compare that to the SPX that has only returned 11.93% over the same timeframe. Schaeffer's Investment Research turns 40 this month! Join in us in celebrating by taking Event Trader out for a spin this month for just $4 by clicking here before the end of the week! **

It was a week of high highs and low lows on Wall Street. Investors returned from a long holiday weekend on Tuesday to a worse-than-expected purchasing managers' index (PMI) reading for June, which led the S&P 500 index (SPX) to snap its seven-day win streak and the Dow Jones Industrial Average (DJI) to shed over 200 points. The Nasdaq Composite (IXIC) just barely eked out another record close, as the 10-year Treasury yield inexplicably slid lower. While it was a mystery as to why bond yields were tumbling this week -- hitting their lowest level since late-February by Thursday -- the drop sent the Nasdaq to yet another record high by Wednesday's close, joined by the S&P 500. The Dow also reversed course after the Federal Reserve's June meeting minutes were released, with the central bank admitting that the recent rise in inflation was something of a surprise this year. 

By Thursday, markets were spiraling out of control, with anxieties over the global economic recovery surfacing yet again. The worldwide spread of the Covid-19 delta variant, which drove Japan to declare a state of emergency in Tokyo ahead of the Olympic Games, poured cold water on several key sectors, including those closely tied to  the economic reopening and semiconductor stocks. The Cboe Volatility Index (VIX) skyrocketed on Thursday, however, overtaking the psychologically significant 20 level mid-session before settling slightly beneath. Today, the Dow is looking to erase the near 500-point drop it suffered yesterday, and all three indexes are eyeing weekly wins. 

Biggest Analyst Calls of the Week

The brokerage bunch had plenty to say this week. Most recently, Levi Strauss & Co (LEVI) attracted a slew of post-earnings bull notes, while United Airlines (UAL) managed two separate price-target hikes, even as the sector came under fire on Thursday. Meanwhile, Raymond James recommended scooping up Sunnova Energy (NOVA) on the dip, and J.P. Morgan Securities called Whirlpool (WHR) a "top pick"  ahead of its earnings report. 

Government Crackdowns Put Pressure on the Tech Sector

It was a whirlwind week for the tech sector. Talks of antitrust regulations in Washington D.C. are weighing on Big Tech today, as the U.S. government attempts to crack down on anticompetitive tactics. Alphabet (GOOGL), specifically, came under pressure for some of these practices in Google's Android app store, which wound up knocking the stock off from Thursday's record peak. 

Amazon.com (AMZN) also touched a record high earlier this week, following news that the U.S. Defense Department cancelled its 10-year JEDI cloud-computing with Microsoft (MSFT), which was worth $10 billion and awarded to the company in 2019. 

New government regulations over in China sunk U.S.-listed shares of several major Chinese tech stocks, including JD.com (JD), which stumbled on news that freshly public ride sharing name DiDi Global's (DIDI) app was blocked from being downloaded as regulators conducted cybersecurity reviews.  

Earnings Season Starts With Banks on Deck

Earnings are back n focus next week, with bank names JPMorgan Chase (JPM), Bank of America (BAC), PNC (PNC), Morgan Stanley (MS), and Wells Fargo (WFC) all set to kick off the latest season. PepsiCo (PEP), Delta Air Lines (DAL), and United Health (UNH) will also release their corporate reports. Investors can also look forward to a monthly report from the Organization of Petroleum Exporting Countries (OPEC), especially after the organization has struggled to reach terms of a production increase. 

In the meantime, check out Senior Vice President of Research Todd Salamone's thoughts on a potential sector corrections in the second half of the year. Plus, Senior Quantitate Analyst Rocky White shares looks back at the healthy gains from the first half of the year, and what it might mean going forward. 

A volatility crush is the term used to describe the result of implied volatility exploding once the market opens higher or lower than where it closed the previous day. For new investors, implied volatility almost always seems to rise after a stock moves in either direction. It is not that unusual for this spike in volatility to occur even when there is a small movement in the stock price. What happens next is known as a “volatility crush” as the option moves through its cycle and back towards the price of the stock.

There are many different aspects of a volatility crush to be aware of as an options trader. Among the most important terms is implied volatility, which occurs in anticipation of a major percentage move. Implied volatility will often decline just before the move happens, setting up long options bets for a profit.

This article discusses implied volatility and volatility crush, as well as several easy ways to benefit from both.

What is implied volatility, and how does it impact options pricing?

Pricing options is a complex science involving the strike price, length of expiry data, stock price, and the expected volatility in price over time. You will find more expensive options when you compare strike price to the current price (or ask to buy) and find a larger difference. Combined with the rapid increase and decrease of the demand in the market, you are creating implied volatility that options traders expect.

Implied volatility is essential to understanding the pricing of any stock or option. Understanding the curve of demand, especially leading up to earnings or big announcements, can be the difference between profiting during a volatility crush and losing your bank.

What is a volatility crush?

A fast, sharp drop in implied volatility will create a volatility crush in the value of an option. This often happens after a major event for the stock, like financial reports, regulatory decisions, new product launches, or quarterly earnings announcements.

Many traders have their eye on the volatility crush – an options trading strategy that uses both puts and calls to profit from an expected dip in implied volatility. It is often based on the idea of an earnings announcement, and more specifically, a stock’s implied volatility in the middle weeks before earnings.

For instance, in these instances, the market makers price into options (via implied volatility) substantial price action ahead of the event. This is why it is essential to understand implied volatility levels prior to initiating a trade. 

If volatility is higher entering a major event, it will be more expensive to buy stock options. After the event, the price of the stock didn’t rise as much as the analysts expected, or the stock price actually went down. While, even when the price of the stock goes up, the uncertainty of price point resistance and other factors decreases the premium on the option. Therefore, the option price drops, and even though the stock may be rising, the option is not.

The disconnect between the stock movement and implied volatility crushes the options market and leaves you, the trader, with a losing trade even though the stock could be increasing.

Another instance is during a significant downside movement on the Market Volatility Index (VIX), typically a macro-level development in the market overall. A significant plunge in VIX is a trigger for traders that implied volatility is higher than historical volatility, and the resulting volatility crush is going to take your profits or turn modest winners into losers, not to mention a horrible entry.

What is an example of volatility related to earnings?

Here are two examples of how to understand volatility in the market:

1. You have AAPL at a share price of $100 the day before earnings, with a straddle price at $2 one day before expiration (market expectation of 2% move on earnings day or $2.00/$100 = 2%).
2. You have TSLA share price of $100 the day before earnings, with a straddle price of $15 one day before expiration (market expectation of 15% move on earnings or $15/$100 = 20%).

It doesn’t take an experienced veteran to see the difference between the market expectations for earning in these two examples. What does this mean to an options trader? Trading on the 15% scenario and selling the straddle pre-earnings, the position would be a winner if the stock never moved less than 15% on earnings day.

Conversely, trading on the 2% example, an options trader with knowledge of historical AAPL earnings reports to understand the significance of a 2% move may elect to stick with the position as a “fairly” valued opportunity. 

Regardless of the strategy or scenario, understanding the historical perspective on volatility is essential to understanding options trading. This is where you find the wins, and the true opportunity of earnings comes to life. With the exception of horrible news like failed technology or company liquidation, earnings are a great opportunity to create a winning trade. Also, in these scenarios where the stock is crashing, options will go into a volatility crush. This may seem obvious and related to fear, but you can imagine this scenario easily. SPY is crashing down, and VIX is going up.

Summarizing Volatility Crush and Implied Volatility Terminology

A volatility crush is an opportunity for traders to take advantage of a pattern of predictable price movement across the options market. When you understand premium rates increasing during a substantial event (like earnings) followed by the decrease in implied volatility, you can make smarter trades, informed positions, and better moves for your overall account.

For any trader, implied volatility (IV) is one of the most important considerations because it has a direct impact on pricing. It’s even more important now as IV spreads have grown significantly wider, and the concept of a “volatility crush” has become an increasingly viable options trading strategy. It has been my experience that implied volatility increases before an earnings announcement and that this increase is due to option writers who want to ensure adequate protection of their portfolios from significant price fluctuations in the market.

Welcome back to our weekly series, Schaeffer's Cannabis Stock News Update, where we recap what happened in the world of marijuana stocks and look ahead to how the cannabis industry continues to shape up in 2021.

Investor interest in the cannabis industry is growing at an explosive rate, and the leading players continue to break through legal barrier after legal barrier, especially in the United States. More than 40 U.S. states legalized recreational and/or medical marijuana by the end of 2020. Now, companies are starting to see the opportunity in cannabis cultivation, marketing, distribution, and technology.

Here is a quick roundup of major (and action-worthy!) cannabis stock news this week:

On July 7, Tilray, Inc. (NASDAQ:TLRY), a global pioneer in cannabis research, cultivation, production, and distribution, announced on that its wholly-owned subsidiary in Germany, Aphria RX GmbH, has completed the first successful harvest of medical cannabis cultivated in Germany for distribution to German pharmacies.

cbdMD, Inc. (NYSE:YCBD), one of the leading and most highly trusted and recognized CBD companies, announced that its recently formed division, cbdMD Therapeutics, has initiated talks with one of the leading U.S. cannabinoid research institutes, to identify novel cannabinoids for therapeutic use on July 8.

Flora Growth Corp. (NASDAQ:FLGC), a leading all-outdoor cultivator and manufacturer of global cannabis products and brands, has engaged Brigitte Baptiste as a strategic advisor to FLGC on July 8. Brigitte, along with academics and researchers from EAN University, will assist in the Flora Growth’s research and development of sustainable and bioprospection initiatives across FLGC’s global premium brand portfolio and will oversee and develop the new cannabis and hemp research programs at EAN University.

Hexo Corp (NYSE:HEXO) reported non-beverage adult-use net incomes in Canada, excluding Quebec, increased by 169% compared to the third quarter of 2020 while upholding the number one position in Quebec. Net income (discounting drink income) increased 14% in Ontario compared to last quarter. Total net deals dropped $10.2 million CAD from last quarter.

On July 6, Innovative Industrial Properties, Inc. (NYSE:IIPR), the first and only real estate company on the NYSE focused on the regulated U.S. cannabis industry, released its operating, investment, and capital markets activity from the second quarter of 2021.  From April 1 through July 6, IIPR made four acquisitions for properties located in Massachusetts, Michigan, and Pennsylvania and executed three lease amendments to provide additional tenant improvements at properties located in Florida and Pennsylvania.

Sundial Growers Inc. (NASDAQ: SNDL) announced on July 7 that it had increased its commitment to SunStream Bancorp Inc. to $538 million CAD from its previously announced commitment of $188 million CAD.

On July 7, ETF Managers Group launched a new leveraged cannabis ETF titled ETFMG 2x Daily Alternative Harvest ETF (NYSE:MJXL) with the goal of leveraging double the exposure of its Prime Alternative Harvest benchmark index. ETF Managers Group also launched the largest cannabis ETF, the ETFMG Alternative Harvest ETF (NYSE:MJ).

Today's wraps up the week with wholesale inventories on tap. 

The following companies are slated to release quarterly earnings today, July 9:

AZZ Inc. (NYSE:AZZ -- $51.54) provides galvanizing and metal coating solutions, welding solutions, specialty electrical equipment, and engineered services to the power generation, transmission, distribution, refining, and industrial markets in the United States and internationally. AZZ will report its Q1 earnings of 2022 before the bell today.                                   

The Greenbrier Co. Inc. (NYSE:GBX -- $40.04) designs, manufactures, and markets railroad freight car equipment in North America, Europe, and South America. Greenbrier will report its Q3 earnings of 2021 before the bell today.

Here is a quick look at how yesterday's earnings announcements played out:

Helen of Troy Ltd. (NASDAQ:HELE -- $232.52) designs, develops, imports, markets, and distributes a portfolio of consumer products worldwide. Helen of Troy reported $3.48 EPS for the quarter, beating analysts' consensus estimates of $2.37 by $1.11. The business had revenue of $541.20 million for the quarter, compared to the consensus estimate of $438.91 million.

Accolade Inc. (NASDAQ:ACCD -- $52.91) develops and provides technology-enabled solutions that help people to understand, navigate, and utilize the healthcare system and their workplace benefits in the United States. Accolade reported ($0.22) EPS for the quarter, missing analysts' consensus estimates of ($0.10) by $0.12. The business had revenue of $59.23 million for the quarter, compared to analysts' expectations of $55.38 million.

Duck Creek Technologies Inc. (NASDAQ:DCT -- $42.23) provides software-as-a-service core systems to the property and casualty insurance industry in North America. Duck Creek Technologies reported $0.03 earnings per share for the quarter, beating analysts' consensus estimates of ($0.01) by $0.04. The firm earned $67.90 million during the quarter, compared to the consensus estimate of $63.81 million.

Levi Strauss & Co. (NYSE:LEVI -- $28.04) operates as an apparel company. Levi Strauss reported $0.23 EPS for the quarter, topping analysts' consensus estimates of $0.09 by $0.14. The business earned $1.28 billion during the quarter, compared to the consensus estimate of $1.21 billion.

PriceSmart Inc. (NASDAQ:PSMT -- $87.71) owns and operates U.S. style membership shopping warehouse clubs in Central America, the Caribbean, and Colombia. PriceSmart reported $0.73 EPS for the quarter, beating the consensus estimate of $0.65 by $0.08. The business earned $895.26 million during the quarter, compared to analysts' expectations of $848.37 million.

Looking ahead to next week, plenty of red-hot economic activity are due out next week and another earnings season slowly rolling out, with bank stocks some of the first to release quarterly reports. Earnings from bank names JPMorgan Chase (JPM), Bank of America (BAC), PNC (PNC), Morgan Stanley (MS), and Wells Fargo (WFC) are all due out, while Wall Street can also expect reports from PepsiCo (PEP), Delta Air Lines (DAL), and United Health (UNH). While the week starts slow, by Thursday there will be plenty of economic data to digest, including a monthly report from the Organization of Petroleum Exporting Countries (OPEC), manufacturing data, and weekly jobless claims. The week will be rounded out with data on retail sales and business inventories. 

All economic dates listed here are tentative and subject to change.

** Schaeffer's Event Trader portfolio has doubled in value (+109.72%, to be exact) over the past six months by simply putting 10% of its portfolio into each simple put or call purchase recommended in the program! Compare that to the SPX that has only returned 11.93% over the same timeframe. To kick off the celebration for our 40th anniversary this month, Bernie is letting you take Event Trader out for a spin this month for just $4 by clicking here before midnight tonight! **

The shares of Conagra Brands Inc (NYSE:CAG) are flat this afternoon, last seen down 0.1% at $36.15. That's not a bad thing, considering the broad market selloff most stocks are mired in right now. Investors are gearing up for the packaged food producer's fiscal fourth-quarter earnings report, due out before the open on Tuesday, July 13. Below, we'll dig into Conagra stock's technical setup ahead of the event, and what investors might be able to expect after its report.

Conagra stock has a history of mostly positive post-earnings reactions during the past two years, including a 15.9% next-day pop in December 2019. The equity did slip 12.1% after its September 2019 earnings report. CAG has averaged a next-day return of 5.8% regardless of direction, which falls in line with the 5.4% move options traders are pricing in this time around next week.

The stock's performance on the charts of late leaves something to be desired. CAG gapped below its year-to-date breakeven near the $36.40 level late last month. The shares have been consolidating just below here since, combined with the 140-day moving average, which has snuffed out any upside in the last week. The stock still has a chance to find its footing at the 320-day moving average, however, and it now sports a six-month lead of 7%. 

It's no surprise then, that analysts aren't  putting much faith in CAG right now. The stock sports just one "strong buy" rating of the six in coverage. Short sellers, meanwhile, have been piling on ahead of CAG's earnings. Short interest rose 18.1% in the last two reporting periods, and now represents almost a week of pent-up buying power, at the stock's average daily pace of trading. 

There are a few bullish holdouts over in the options pits, though. the equity's 50-day call/put volume ratio of 2.83 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands higher than 81% of readings from the past year. This suggests a penchant for long calls of late. Given the bevy of short sellers flocking to the equity, its possible some of these shorts could be using calls as an options hedge.