Brokerage firm Jefferies this morning issued a thorough note on the video game sector. Analyst Timothy O'Shea said a survey of 500 gamers pointed toward Take-Two Interactive Software, Inc.'s (NASDAQ:TTWO) "Red Dead Redemption 2" as the winner of the holiday season. TTWO shares are trading up 2.3% at $107.85 in response.

Looking back, the security has been disappointing on the charts since its high of $139.91 on Oct. 1. It was down roughly 4% year-to-date coming into today, and there's recently been a notable rise in short interest. More specifically, the number of shares held by TTWO short sellers increased by 83% in the past two reporting periods.

Moving on, Jefferies had less compelling words for Electronic Arts Inc. (NASDAQ:EA), labeling the company's "Battlefield V" as the loser of this holiday season. O'Shea added that EA's "FIFA" game has also struggled. The stock's losses have been even steeper than sector peer Take-Two, with the shares collapsing from $151.26 back in July to today's perch at $84.91.

Checking in on some more losers, Activision Blizzard, Inc. (NASDAQ:ATVI) and GameStop Corp. (NYSE:GME) were also mentioned. Jefferies sees ATVI's "Call of Duty" and "Overwatch" games both struggling due to the popularity of "Fortnite," while signs of an increase in digital game downloads could be a negative for GME. ATVI hasn't avoided the sector headwinds, down 42% this quarter to trade at $48.99. GameStop stock has been terrible for years and was last seen at $12.95.

KBW is cautious on the banking sector in 2019, saying it does not "see enough positive catalysts emerging," and suggesting traders "stick with quality and self-help stocks." Additionally, the brokerage firm downgraded several bank stocks to "market weight" from "overweight," including Bank of America Corp (NYSE:BAC). KBW also dropped its BAC price target to $29 from $34 -- still an 18% premium to last night's close.

Despite the downgrade, BAC shares are up 0.3% in early trading at $24.65. The stock has shed more than 25% from its mid-March post-recession peak of $33.05, and hit a 15-month low of $24.29 on Monday. Underscoring this technical weakness, Bank of America is bracing for its worst quarterly performance since March 2016, down 16.6% so far. As such, the equity's 14-day Relative Strength Index (RSI) settled at 28 last night -- in oversold territory -- suggesting a short-term bounce may have been in the cards.

Options traders have remained upbeat, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 35,104 calls in the last 10 sessions, compared to 67,530 puts. The resultant call/put volume ratio of 5.24 ranks in the 81st annual percentile, meaning calls have been bought to open over puts at a quicker-than-usual clip.

At least some of this buying activity was centered at the weekly 12/14 26-strike call, which saw nearly 88,000 contracts added in the last two weeks. Data from the major options exchanges confirms a number of these positions were purchased in recent weeks, suggesting speculators are betting on BAC stock to bounce back above $26 by expiration at the close this Friday, Dec. 14.

Shares of Neurocrine Biosciences, Inc. (NASDAQ:NBIX) are down 21% at $67.77, after the company said its Tourette's drug failed a mid-stage trial. The dramatic early drop sent NBIX stock to a new annual low of $64.72, and the security is pacing for its worst day since September 2013.

NBIX has surrendered roughly 47% since its record high of $126.98 in mid-September, and is back in the red on a year-to-date basis. Prior to today, the stock was testing its footing atop the $85 level, with resistance emerging around $90.

The drug concern could be at risk for a round of downgrades and price-target cuts, too. Twelve of 13 analysts consider NBIX a "strong buy" or "buy," with not a single "sell." Plus, Neurocrine Biosciences sports a lofty $129.80 consensus 12-month price target -- at a 91% premium to current levels. 

Recent option buyers may be kicking rocks. NBIX sports a 10-day call/put volume ratio of 20.36 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio indicates that traders have bought to more than 20 NBIX calls for every put during the past two weeks. What's more, this ratio stands higher than 91% of all other readings from the past year, pointing to a healthier-than-usual appetite for long calls over puts lately. 

Today, puts are more popular, unsurprisingly. NBIX has seen roughly 4,200 puts change hands -- 27 times the average intraday pace -- compared to just under 3,700 call options. Put volume is pacing for an annual high, in fact, with the December 70 put most active today.

Unless you've been hiding under a rock, you're probably aware that the stock market has been pretty volatile lately, especially compared to the slow burn higher of 2017. Day traders especially might have noticed the massive intraday swings we've experienced lately; for instance, the Dow erased a 500-point deficit to end higher Monday, and traded in a range of 500 points on both sides of breakeven yesterday. So, just how sensitive is Wall Street's proverbial hair trigger right now, and what could that mean for stocks heading into 2019?

The S&P 500 Index (SPX) on Tuesday endured its fifth straight session where it moved at least 2% from its intraday low to its intraday high. The last time this happened -- considering just one signal every 21 days -- was in late October, when stocks were wrapping up a brutal month. Prior to that, you'd have to go back to the "flash crash" of August 2015 for a volatility signal, which was the first of its kind since September 2011, per data from Schaeffer's Senior Quantitative Analyst Rocky White. Below are all of the SPX volatility signals since 1980, of which there are 23.

It seems stretches of extra volatility tend to beget more volatility, in the short-to-intermediate term, at least. The standard deviation of S&P returns after these stretches is higher than normal, as you can see on the chart below.

As far as performance after signals, it's difficult to get a good read. The SPX was higher than normal in the short term, averaging a one-week gain of 0.73% after signals -- that's more than three times its average anytime one-week return of 0.19%. On the other hand, one month after signals, the index was higher by just 0.05%, on average, compared to 0.79% anytime. Looking six months out, that underperformance continued, with the S&P up a weaker-than-usual 3.9%, and higher just 50% of the time.

In conclusion, stocks' longer-term trajectory will likely be determined by macro events, like the U.S.-China trade war, the Fed's pace of rate hikes, and possibly even a hard Brexit from the European Union in March. In the near term, at least, traders should watch the S&P's movement between the 2,600 and 2,800 levels, per Schaeffer's Senior V.P. of Research Todd Salamone, and hope that another rough start to December once again bodes well for bulls in the end.

The shares of Galmed Pharmaceuticals Ltd (NASDAQ:GLMD) are trading up 17.7% at $9.32, after B. Riley initiated coverage on the drug stock with a "buy" rating and $28 price target -- a 253% premium to last night's close. The brokerage firm waxed optimistic on Aramchol, the drugmaker's Non-Alcoholic Steatohepatitis (NASH) treatment.

This upbeat outlook echoes the bullish bias already displayed by the brokerage bunch, with 100% of analysts in coverage maintaining a "buy" rating. Plus, the average 12-month price target sits all the way up at $33.38, well above GLMD's record high of $27.06 from June 12.

Short interest, meanwhile, is down 83% since its early August all-time peak of 640,000 shares. The 110,000 shares currently dedicated to these bearish bets account for just over 1% of GLMD stock's float, and would take roughly one session to cover, at the security's average pace of trading.

Looking at the charts, the drug stock has been in a downtrend since that mid-June bull gap. More recently, Galmed Pharmaceuticals shares have been churning beneath a trendline connecting lower highs since early October, and bottomed at a six-month low of $7.83 yesterday. Plus, today's upside is being contained by GLMD's 320-day moving average, which has been a ceiling since mid-November.

The yield curve is created by plotting the yields on U.S. Treasuries at various maturities. It’s getting a lot of press lately because the five-year rate has overtaken the two-year rate. It’s expected that the 10-year rate will soon surpass the two-year rate, meaning an inversion between the more popular 2-year/10-year yield spread. An inverted yield curve is a popular predictor of recessions.

Yield Curves and Stock Prices

While recessions, or economic slowdowns, are obviously bad for stocks, they are often determined after the fact. Also, they don’t line up perfectly with stock market corrections. Below, I’m looking at historical yield-curve data, especially when the 2-year/10-year spread inverts, and focusing on the reaction of stock prices rather than when it’s determined that the economy is in recession. For us, stock prices are what’s important.   

Here’s a chart of the S&P 500 Index (SPX) and the yield spread going back to 1988. The last two major stock crashes were preceded by a negative yield spread.   

I went back to 2000 and created five brackets based on the level of the yield spread at the end of each week. I made it so each bracket had about the same number of returns. The one-year stock returns look better at high spreads. The current spread is around 13 basis points, putting us squarely in that first bracket where the S&P 500 averages about a 2% loss over the next year, with less than half of the returns positive.   

Increasing vs. Decreasing Spreads

Before selling equities, however, look at the next set of tables. There’s a big difference in stock returns going forward depending on whether the spread is increasing or decreasing. As you see in the chart above, the spread is in free-fall. The returns going forward in this situation are not so black and white.

The best average return occurs in that second bracket, where there’s a relatively low spread. The current situation -- a low and decreasing spread -- shows underperformance, but the SPX still averages a one-year gain of about 3%, and two-thirds of the returns are positive.

The second table below shows the real trouble tends to start when the spread is low and then starts increasing. Once we reach that situation, it’s time to worry, as the historical returns are awful.   

When the Curve Inverts

When/if we see the 10-year yield overtake the two-year yield, we’re sure to be inundated with articles explaining how a recession is imminent. The data below says to resist the urge to immediately sell your stocks.

Each time since 1976 (the year we began getting two-year yield data), when the yield curve inverted for the first time in at least a year, three out of five times the S&P returned at least 10% over the next year. Stocks lost value only one time. The longer-term returns do give reason for caution. The five-year returns were flat following the last inversion, and negative the two times before that. 

The chart below shows the S&P 500 performance after each inversion occurrence listed above. The stock market sell-off was imminent in just one instance (the 2000 signal). The other four times, if you had sold out of stocks right away, you would have missed out on some decent gains over the next two years.

The five-year returns warrant some caution. In the first two instances, the returns were adequate, a little more than 10% per year annualized. The last three inversions have led to flat five-year returns or double-digit percentage losses. The average five-year return is about 20%, which is a meager 3.8% per year annualized.     

Based on all this, don’t let doom-and-gloom recession articles persuade you to sell out of stocks when the yield curve first inverts. Be cautious, though, over a longer time horizon. The best course of action might be to watch the yield spread and sell once it bottoms and starts moving higher. 

Perhaps no stock has fallen further from grace during the broad market sell-off than Nvidia Corporation (NASDAQ:NVDA). Today, the chip stock is down 0.6% in electronic trading, after RBC trimmed its price target to $230 from $260, but even that still represents a 55% premium to yesterday's closing perch of $148.19. Also adding pressure is a report out of Bloomberg yesterday that SoftBank could soon sell its stake in the company.

Nvidia stock sat at a record high of $292.76 on Oct. 2. Since then, a number of bear gaps have dragged NVDA lower to shed more than half of its value, form a death cross, and hit an annual low of $133.31 on Nov. 20. And even a subsequent rally from that bottom was turned away by the shares' 20-day moving average. 

Analysts for the most part remain committed to the equity. Of the 26 brokerages covering NVDA, 16 rate it a "buy" or better, with only one "sell" on the books. What's more, the stock's consensus 12-month price target of $228.88 is right in line with RBC's bear note today, but still a ways away from its current levels.

In the options pits, the security's Schaeffer's put/call open interest ratio (SOIR) comes in at 0.76, which ranks in the lowest annual percentile. In other words, options traders seem relatively upbeat amid this steady downtrend, with data showing a higher-than-normal preference for near-term calls over puts.

It wasn't that long ago that Wall Street was celebrating Apple's (AAPL) record-setting incursion into trillion-dollar market cap territory -- and so the spate of recent headlines (perhaps colored with the faintest tint of Schadenfreude?) crowing that Microsoft (MSFT) had now surpassed its cooler, upscale rival in terms of total market value must have seemed rather abrupt to the ever-present contingent of AAPL faithful. In fact, as of this writing, Apple's market cap of $767.34 billion is smaller than that of both Microsoft ($800.55 billion) and Amazon.com (AMZN) ($784.12 billion), though still ahead of Alphabet (GOOGL), at $711.38 billion.

As some quick mental math will likely tell you, that sharply reduced AAPL market cap is the result of the vaunted Dow stock stumbling headfirst into its very own bear market. From its Oct. 3 all-time intraday high of $233.47, the stock has lost a total of 27.8%, as of Friday's close. In fact, a daily chart shows that AAPL gapped dramatically into bear-market status following its initial close below the "official" $186.78 threshold on Nov. 19. Since then, a rebound attempt by the equity has been rejected near the site of the pre-gap lows, with the Dec. 3 high ringing in at $184.94.

But our focus in today's column is on Apple's weekly chart, and specifically on the significance of its 64-week moving average -- a trendline that's chronologically analogous to one of our favored "under-the-radar" daily moving averages, the 320-day. Per the accompanying chart, the 64-week moving average briefly acted as resistance back in the third quarter of 2016, but then AAPL successfully tested support at this trendline in the fourth quarter of that year ahead of its lengthy 2017-2018 run up the charts.

Following that breakout roughly two years ago, support at the 64-week wasn't tested again until early in 2018, amid the bout of broad-market volatility that shook up the stock market at the start of February. At the time, the 64-week moving average was crossing through the round $150 region, and these two technical levels collaborated to create a firm layer of support to contain Apple's sell-off. (Which, not insignificantly, coincided with AAPL's first breach of its 32-week moving average, in blue, since the third quarter of 2016.) Later, an April drawdown took AAPL close to its 64-week moving average, but not quite close enough for a formal test.

Then, on Nov. 20, AAPL gapped lower on iPhone demand concerns, and opened starkly below its 320-day trendline in the process. That Friday, in the shortened post-Thanksgiving session, the stock collected a weekly finish beneath its 64-week moving average for the first time in more than two years.

Last Monday, a broad-based rally swept Apple stock above its 320-day moving average by the close, after the stock had just closed its second consecutive Friday below its 64-week trendline. But the gains last week were short-lived, for AAPL and for the rest of the equities market. And after peaking almost squarely at the site of its 64-week moving average, the world's one-time trillion-dollar wonder closed the week 5.7% lower, and just below the round $170 level.

AAPL could very well find some traction around here in the short term, as $169 is home to its year-to-date breakeven mark, and the September 2017 highs around $165 also provided a floor earlier this year. But the speed and strength with which the 64-week moving average emerged last week as a stiff layer of resistance should be cause for concern, as Apple -- until very recently, the sector-leading stock of the market-leading sector -- appears set for, at the very least, a continued period of volatile, choppy price action.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, December 9.

Shares of Cisco Systems, Inc. (NASDAQ:CSCO) are up 0.7% to trade at $47.20, after analysts at Wolfe Research initiated coverage with an "outperform" rating and a $56 price target -- representing expected upside of about 20% to Monday's close, and in territory not charted since 2000. This follows yesterday's win when CSCO -- along with this mobile app maker -- was named a "best idea for 2019" by Cowen.

The stock has climbed 23% year-to-date, with pullbacks supported by the 200-day moving average. The equity has been somewhat choppy since its Oct. 3 17-year high of $49.47, but just last week came within a point of this milestone before pulling back.

Cowen and Wolfe aren't the only analysts showing love for the tech giant. The majority of analysts following CSCO issue a "strong buy" or "buy" rating, with not a single "sell" recommendation. On the other hand, the blue chip would need to rally just 11% to hit its consensus 12-month price target of $52.32. 

Options traders, meanwhile, have grown wary of Cisco Systems lately. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day put/call volume ratio of 0.63 -- in the 76th percentile of its annual range. While this ratio indicates that long calls still outnumbered puts on an absolute basis, the annual percentile points to a healthier-than-usual appetite for bearish bets over bullish of late.

Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.04 is higher than 86% of all others from the past year. This suggests short-term options traders have rarely been more put-biased in the past 12 months.

The VanEck Vectors Oil Services ETF (OIH) is failing to capitalize on an up day for oil prices. After bottoming at a record low of $16 earlier, the fund -- whose main holdings include Schlumberger (SLB) and Halliburton (HAL) -- was last seen trading down 2.7% at $16.18, pacing for a fifth straight loss. This follows downwardly revised 2018 and 2019 oil price forecasts from the U.S. Energy Information Administration (EIA).

The fund has been locked in a long-term downtrend, with its most recent leg lower sparked by unsuccessful tests of its 120-day and 200-day moving averages back in early October. Since its Oct. 9 peak at $26.33, the exchange-traded fund (ETF) has shed more than 39%, putting OIH on track for its worst quarter ever.

Options traders, meanwhile, have been actively accumulating calls on OIH in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the fund's 10-day call/put volume ratio of 13.14 ranks in the 97th annual percentile, meaning puts have been bought to open over calls at a faster-than-usual clip.

While the bulk of this activity has centered at the weekly 12/28 20-strike call, today's options traders are targeting the January 2019 18-strike call. With call volume running at six times the average intraday pace, Trade-Alert pegs buy-to-open activity at the back-month strike, suggesting speculative players are targeting a short-term bounce for the oil ETF.

It's possible short oil traders are contributing to this call-heavy activity, using options to hedge against any upside risk. Whatever the reason, short-term OIH options are pricing in sky-high volatility expectations at the moment, per the fund's 30-day at-the-money implied volatility (IV) of 44.1% -- an annual high. Plus, the ETF's 30-day IV skew of 4.7% registers in the 15th percentile of its 12-month range, indicating call options are near parity with their put counterparts.

After trading higher most of the day, U.S. stocks have turned lower, marking another session of intense volatility. Three names in particular making big moves are online styling platform Stitch Fix Inc (NASDAQ:SFIX), drugmaker Portola Pharmaceuticals Inc (NASDAQ:PTLA), and regenerative tissue specialist PolarityTE Inc (NASDAQ:PTE). Here's what's moving shares of SFIX, PTLA, and PTE.

Client Growth Concerns Send SFIX Spiraling

SFIX stock is selling off today after earnings, last seen trading down 24.4% at $19.62. The company actually topped profit and revenue estimates with its fiscal first-quarter results, but current-quarter user growth -- which Stitch Fix expects to remain flat -- is causing today's selling. The shares earlier traded as low as $18.40, right above their lows from June, and have lost 62.6% since a September peak above $52.

A number of bearish analyst notes have added to the equity's woes, including a downgrade to "market perform" at William Blair and a price-target cut to $25 from $36 at J.P. Morgan Securities. The majority of analysts covering SFIX shares already had "hold" ratings coming into today, though there are still four bullish recommendations, as well.

Ondexxya Delay Has PTLA Flirting With New Low

PTLA is down 9.5% at $18.91, after European regulators extended the review period of the company's bleeding drug, Ondexxya, which was approved by the U.S. in May. With today's slide, the shares are again approaching their nearly two-year low of $18.18 from last month, with the 50-day moving average acting as resistance along the way.

Overall, Portola Pharmaceuticals is down over 60% in 2018. All of this is great news for short sellers, who control more than one-fourth of the total float after a 9.3% increase in the number of shorted shares during the last reporting period. Based on average daily volume, it'd take these bears more than two weeks to buy back their shares.

PTE Stock Jumps After Board Announcement

PTE shares are getting a jolt today after the company announced the addition of former Food and Drug Administration (FDA) official and Johnson & Johnson (JNJ) executive Minnie Baylor-Henry to its board. The stock is up 9.6% at $15.53 at last check, an upside move that was badly needed. More specifically, the shares had been sliding on the charts since jumping up to $41.22 back in June. This would mark PolarityTE's first close above the 50-day moving average since early September. We'll see if today's news attracts more analyst attention, since there's only one covering the security at the moment.

Defense stocks are higher today, bucking the broad-market sell-off, amid reports that President Donald Trump is performing an about-face on defense spending. The president in October said the defense budget for 2020 would be $700 billion, about a 5% cut, but rumor has it he told Defense Secretary Jim Mattis to submit a $750 billion budget. Against this backdrop, shares of Lockheed Martin Corporation (NYSE:LMT) and Raytheon Company (NYSE:RTN) are higher, and LMT and RTN options are more active than usual.

Lockheed Martin stock was last seen 3.3% higher to trade at $294.73, after last week touching an annual low of $277.22. The shares are still down more than 14% in the fourth quarter, but pullbacks have been contained in the $285 area. Meanwhile, the $290 level represents a 20% pullback -- and bear-market territory -- from LMT stock's February all-time high of $363. Prior to today, the security's 14-day Relative Strength Index (RSI) sat at 31 -- near oversold territory, suggesting a short-term bounce may have been in the cards.

In early afternoon action, Lockheed calls are trading at twice the average intraday pace, with roughly 2,800 contracts exchanged thus far. That's compared to fewer than 1,400 puts traded. The weekly 12/14 300-strike call is most active, though it appears some speculators are selling the options to open. If so, the traders expect the round-number $300 level to remain a short-term ceiling for LMT shares through the end of this week, when the options expire.

Bearish options betting has been ramping up on LMT in the past couple of weeks. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.91 stands in the 89th percentile of its annual range. This tells us that while long calls have outnumbered puts on an absolute basis, the pace of bearish betting has been faster than usual lately.

Raytheon shares were last seen 2.9% higher to trade at $169.95. As with LMT, RTN last week fell to its lowest point since mid-2017, dropping to $162.31 on Dec. 6. The equity is down about 18% so far in the fourth quarter, and roughly 26% since its April 24 record peak of $229.75. The stock's 14-day RSI stood at 32, as of Friday's close.

RTN has seen about 2,400 calls and a near-equal number of puts change hands today, compared to its average intraday volume of roughly 1,400 calls and 1,300 puts. As such, the equity's 30-day at-the-money implied volatility stands at 29.3%, in the 99th percentile of its annual range.

Garnering notable attention today have been the weekly 12/14 165-strike put and 177.50-strike call, where new positions are being opened. Buyers of the puts expect Raytheon stock to resume its slide and breach $165 by Friday's close, while the call buyers expect RTN to continue higher and top $177.50 by the weekend.

Even before today, short-term option traders were paying up to speculate on RTN. The stock's Schaeffer's Volatility Index (SVI) of 33% is in the 97th percentile of its annual range, indicating near-term options are pricing in relatively lofty volatility expectations for the defense stock.