"Not only is the excitement of the early August Fed pause over, but the height of earnings season is behind us, and market participants are now more likely to trade off macro headlines -- most notably, headlines regarding trade negotiations.

"... I am seeing cross-currents that might suggest range-bound trading into the end of the month. For example, the SPX rallied above the 2,900-century mark in late August, but the breakout was short- lived and a pullback has since pushed the index back below this level. But as I said earlier, the SPX appeared to be finding support around its January 2018 high in the immediate aftermath of Friday's trade headlines, suggesting a bounce could be imminent following the weakness that occurred in the first week of September."
-- Monday Morning Outlook, September 10, 2018

After a steady decline throughout the first week of September, the S&P 500 Index (SPX - 2,904.98) reversed gear last week. The equity benchmark advanced throughout most of the week, and finished Friday just above its month-end August close at 2,901.52.

As I anticipated last week, macro headlines on trade issues influenced stocks, with the SPX jumping early in the week on reports from The Wall Street Journal that the U.S. was set for a new round of trade talks with China. But as you can see on the chart below, about halfway through Friday's trading session, Bloomberg reported that President Donald Trump still wants to pursue $200 billion in tariffs on Chinese goods, even as a fresh round of talks could be coming. The SPX sold off as traders quickly pushed it down to its August closing level. In assessing the first two weeks of September, weekly moves that have added up to a total of roughly 96 absolute points have netted nearly zero in directional movement.

As we await the outcome of the Sept. 26 Federal Open Market Committee (FOMC) meeting, when another interest rate hike is expected to occur, I would not be surprised to see equity benchmarks dance around key psychological round-number century and millennium marks that have been highlighted in this report the past few weeks -- such as SPX 2,900, Nasdaq Composite (IXIC - 8,010.04) 8,000, and Russell 2000 Index (RUT - 1,721.72) 1,700.

The RUT, for what it's worth, first touched 1,700 in June and finally broke above it in mid-August, but retested this area last Wednesday. Its September high is 1,740, with the 1,740-1,750 area potentially marking resistance in the weeks ahead.

With the SPX entering the week trading around last month's close, the late-August high around 2,915 serves as a potential short-term resistance point and the January 2018 closing high at 2,873 should continue to act as support, as it did on Sept. 7. This level is just above the index's 30-day moving average, which was supportive last month and in May.

If the resistance and support levels discussed above are broken, I could see the SPX 2,850 half-century mark as another area of support. SPX 2,940 would likely act as short-term resistance, which is a round 10% above the 2017 close and the site of a trendline connecting higher highs since mid-May.

It's standard September options expiration week, so I checked into the SPDR S&P 500 ETF Trust (SPY - 290.88) open interest configuration to see how the options market might influence the SPY in the coming days. Immediately standing out is the call open interest immediately overhead. In fact, data from the Chicago Board Options Exchange (CBOE) indicates that most of the 291-strike calls were sold to open. The implication is that selling may occur as the SPY approaches this strike, as buyers of those calls (market makers) who want to stay neutral on their position will short more and more SPY or S&P futures to remain delta-neutral as the SPY moves up to and above the strike. The 295-strike call open interest is also heavily seller-driven, implying an options-related lid at the SPY 291 and 295 strikes.

As far as open interest below the SPY, the 285 strike stands out, where there is big put and call open interest. This coincides with the SPX 2,850 half-century mark that I mentioned as a potential support level on a pullback.

Unlike most other expirations, and due to many of the options being sold to open, the current open interest configuration suggests a dull expiration week. At the very least, it is not a week in which options are likely to magnify major moves, as options that are sold to open typically dampen, rather than enhance, volatility. That said, if there is a catalyst that pushes the SPY through the call-heavy 291 and 295 strikes, the prospect of the call sellers closing their positions to manage losses would have bullish implications as floor traders unwind short positions associated with those calls.

U.S. stock bulls should stay the course. If you are concerned about trade war risk in the coming days, consider the purchase of put options on emerging market exchange-traded funds (ETFs), such as the iShares MSCI Emerging Markets ETF (EEM). With implied volatility readings in the 18-20 range on the EEM, compared to 63-day historical volatility running at 19%, options on the ETF are reasonably priced.

Continue reading:

• Indicator of the Week: S&P Volatility Signal Hints at Sluggish September
• The Week Ahead: Investors to Eye China Trade Developments, Micron Earnings Next Week

AutoZone, Inc. (NYSE:AZO) will report fiscal fourth-quarter earnings ahead of the open tomorrow, Sept. 18. The do-it-yourself car repair retail stock has been fairly quiet on the charts in the month leading up to tomorrow's report, as evidenced by its 30-day historical volatility of 15.4%, which ranks in the 9th annual percentile. Nevertheless, options traders are anticipating a larger-than-usual post-earnings swing for AZO stock.

Most recently, data from Trade-Alert pegs the implied daily earnings move at 8% for AZO stock, higher than the post-earnings next-day swing of 4.9% the stock has averaged over the last two years. These earnings reactions have mostly been to the downside, including the two most recent. Of those eight results, just three were large enough to exceed the move expected for tomorrow's trading -- a 9.5% drop in May, an 11.1% plunge in February, and an 11.8% slide in May 2017.

Drilling down on recent options activity points to a slightly heavier-than-usual bullish tilt. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AutoZone's 10-day call/put volume ratio of 1.03 ranks in the 65th annual percentile.

Meanwhile, the 30-day at-the-money implied volatility (IV) for AZO is at 30.9%, which ranks in the 73rd annual percentile -- indicating short-term options are pricing in higher-than-normal volatility expectations. Plus, the 30-day IV skew of 2.8% registers in the 10th percentile of its 12-month range, meaning short-term calls have rarely been more expensive than puts, from a volatility perspective.

Looking at the charts, AZO shares have been in a channel of higher highs and lows since hitting a year-to-date low of $590.76 in late April. More recently, the stock's pullback from its early September seven-month high of $784 was quickly contained by its 40-day moving average -- which served as support back in July -- with AutoZone last seen trading up 1.1% at $756.98.

 

 

Teva Pharmaceutical Industries Ltd (NYSE:TEVA) is extending its recent hot streak today, up 4.6% to trade at $24.13 -- pacing for a third straight win. Driving the shares higher is a Food and Drug Administration (FDA) approval for the company's migraine drug -- which was met with an upgrade to "neutral" from "sell" at BTIG, and price-target hikes at Credit Suisse (to $26) and Mizuho (to $29). However, a pullback could be imminent, if the stock's meet-up with a historically bearish trendline is any indication.

More specifically, Teva stock is now within one standard deviation of its 40-day moving average. Over the past three years, there have been 11 other instances of TEVA meeting up with its 40-day trendline after trading south of it at least 60% of the time over the previous two months. Those previous pullbacks have resulted in an average one-month negative return of 3.49%, per Schaeffer's Senior Quantitative Analyst Rocky White, with only 36% of the returns positive.

An added layer of trouble could be found at the stock's current level, which coincides with a 23.6% Fibonacci retracement of TEVA's rally off its April lows to its August annual high at $25.96. Plus, this $24 region contained the security's late-July rally attempt.

In the options pits, TEVA calls have become more popular lately, as evidenced by data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which shows the security with a 10-day call/put volume ratio of 2.49, a ratio that ranks in the 82nd annual percentile. This means Teva calls have been purchased at a near-peak pace relative to puts during the past two weeks.

Regardless of whether it's calls or puts, though, it's an attractive time to buy premium on TEVA options. The stock has a Schaeffer's Volatility Index (SVI) of 43%, which ranks in just the 20th annual percentile. This reveals the stock's short-term options are pricing in unusually low volatility expectations at the moment.

GrubHub Inc (NYSE:GRUB) is slightly lower in today's trading, but this past Friday surged to a fresh record high of $149.34, after receiving a bull note from Wedbush. The firm initiated coverage with an "outperform" rating and set a price target of $180 -- a 28% upside to the stock's current perch of $141.14. Below we will dig deeper into the security's technical performance, and learn why data from Schaeffer's Senior Quantitative Analyst Rocky White suggests that now may be an ideal time to bet on GRUB's next leg higher. 

The food delivery stock has been moving higher on the charts long term, benefiting from a line of support at the rising 20-day trendline. And despite today's pullback, losses have been capped at the $140 mark and aforementioned moving average. Overall, the shares have nearly doubled year-to-date.

Moving on, GrubHub stock's short-term options are attractively priced right now. This is per the security's Schaeffer's Volatility Index (SVI) of 38%, in the 13th percentile of its annual range, suggesting near-term options are pricing in relatively low volatility expectations.

According to White, there have been eight other times since 2008 the equity was trading near new highs when its SVI was simultaneously perched in the lower 20th percentile of its 12-month range. After these signals, the shares were higher 75% of the time one month later, and up an average of 6.39%.

Looking toward analyst sentiment, the majority of those covering the food stock carry "hold" or worse recommendations. Plus, GRUB's average 12-month price target comes at a slight discount to current levels, meaning the security is well overdue for a round of analyst upgrades and/or price-target hikes.

Finally, short interest fell roughly 8.2% during the two most recent reporting periods, yet the 5.84 million shares still sold short account for a healthy 7.4% of the available float, or 6.3 times the average daily pace of trading. Continued covering could create bigger tailwinds for GrubHub stock.

The shares of Netflix, Inc. (NASDAQ:NFLX) fell on Monday, dropping with fellow FAANG stocks. While NFLX stock is attempting to recoup some of those losses today, it could be time to speculate on more short-term downside for the streaming entertainment giant, if recent history is any indicator.

Netflix stock was last seen 2.4% higher at $358.72, as traders applaud a stellar night at the Emmy Awards. However, the security is still staring up at its 80-day moving average. In the past three years, there have been four other times at which Netflix shares moved to within one standard deviation of their 80-day trendline, after spending at least 60% of the past two months and eight of the last 10 sessions below the moving average. After these signals, NFLX was down nearly 4%, on average, one month later, and lower 75% of the time, per data from Schaeffer's Senior Quantitative Analyst Rocky White.

In addition, the FAANG stock has struggled recently to top the $370 area -- which represents a roughly 100% year-over-year gain -- and has been in a channel of lower highs and lows since touching a record high of $423.20 on June 21. Not to mention NFLX is facing another potential short-term speed bump in the form of notable call open interest at the soon-to-expire September 370 strike.

In fact, short-term traders have rarely been more call-heavy on Netflix in the past year. The stock's Schaeffer's put/call open interest ratio (SOIR) -- which measures options expiring in the next three months -- sits at 0.89, in just the 15th percentile of its annual range.

Echoing that, the stock has racked up a 10-day call/put volume ratio of 1.71 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This indicates speculators have bought to open nearly two NFLX calls for every put in the past two weeks. What's more, the ratio registers in the 90th percentile of its annual range, pointing to a much healthier-than-usual appetite for bullish bets over bearish.

In conclusion, with several potential layers of resistance overhead, the FAANG stock could be due for some short-term headwinds. From current levels, another 4% retreat from the 80-day moving average would put the shares around $344.37 in the next month.

Last week, Kroger Co (NYSE:KR) gapped lower following a second-quarter same-store sales miss. However, this drastic pullback could present a buying opportunity, if history is any guide.

Specifically, Kroger stock is now within one standard deviation of its 200-day moving average. Over the past three years, there have been two other instances of KR pulling back to this trendline after trading above it at least 60% of the time over the previous two months. These signals have resulted in an average one-month return of 7.3%, per Schaeffer's Senior Quantitative Analyst Rocky White, with both of the returns positive.

A rally of similar magnitude this time around would have Kroger stock paring most of its earnings-induced losses from last week. Despite the recent technical troubles, KR still boasts a 36% lead in the past 12-months, and nabbed a fresh annual high of $32.74 on Sept. 6. Today, the security is up 1% at $29.15.

Another rally could prompt analysts to rethink their skeptical stance. Of the 14 brokerages covering KR, half rate it a tepid "hold." Further, the security's consensus 12-month price target of $30.82 is a slim 5.7% premium to current trading levels. 

Short sellers have been headed for the exits, and continued covering could also provide tailwinds for the grocery name. Short interest dropped by one-quarter in the two most recent reporting periods, but the 35.7 million KR shares still sold short represent 4.3 times the average daily pace of trading.

Traders wanting to bet on a short-term bounce may want to do so with Kroger options. The stock has a Schaeffer's Volatility Index (SVI) of 25%, which ranks in just the 6th annual percentile. This reveals the stock's near-term options are pricing in unusually low volatility expectations at the moment.

In addition, the security has been a good target for premium buyers during the past year. That's according to its Schaeffer's Volatility Scorecard (SVS) of 88 out of 100, which shows Kroger has tended to make much bigger moves on the charts compared to what the options market was expecting.

Shares of Red Hat Inc (NYSE:RHT) are slightly lower in afternoon trading after J.P. Morgan Securities dealt another bear note in today's trading, downgrading the software concern to "neutral" from "overweight" and slashing its price target to $150 from $160. From a broader viewpoint, 10 of 18 covering analysts sport "strong buy" ratings on the stock. Plus, this bear note comes just one day before Red Hat is scheduled to report its second-quarter earnings.

RHT is down 1% at $143, giving up a short-term floor at the 50-day moving average. This comes after the equity was firmly rejected at the 80-day moving average. Despite its recent underperformance, Red Hat stock remains up 19% year-to-date.

Red Hat is scheduled to report earnings after the market closes tomorrow, Sept. 19. Digging into its earnings history, RHT has closed higher the day after the company reports in five of the past eight quarters. However, the stock suffered a steep 14.2% drop after reporting in June, while overall the shares have averaged a 7.1% move the day after earnings over the last two years, regardless of direction. This time around, the options market is pricing in a larger-than usual 12.5% move for Thursday's trading.

In the options pits, traders have been leaning bullish in recent weeks. This is per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which shows a 10-day call/put volume ratio of 1.96, ranking in the 81st annual percentile. This indicates that calls have been bought over puts at a faster-than-usual clip.

Echoing this is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.37, which ranks in the low 16th percentile of its annual range. This means short-term traders have rarely been more call-heavy on Red Hat in the past year.

Visa Inc (NYSE:V) has been a darling of the Dow this year; it's one of the top blue-chip gainers in 2018. After settling a credit-card dispute with sector peer MasterCard (MA), Visa stock is up 1% to trade at $147.55 today, a chip-shot from Friday's record high of $148.37. The fun could be far from over, though, as history suggests V shares could be headed even higher in the coming month.

Specifically, the stock's Schaeffer's Volatility Index (SVI) of 17% ranks in the 19th percentile of its annual range. This indicates short-term options are cheap, from a volatility perspective. What's more, per data from Schaeffer's Senior Quantitative Analyst Rocky White, the four other times V has been trading within 2% of a new 52-week high while front-month volatilities have been this low resulted in an average one-month gain of 3.1%. Plus, all four of those returns were positive.

A rally of similar magnitude this time around would mean fresh record highs above $150 for Visa stock, which boasts a 29% lead in 2018. V shares are headed toward their sixth straight monthly win, with recent pullbacks contained by their 50-day moving average. 

Short sellers have been headed for the exits, and continued covering could provide tailwinds for the Dow stock. Short interest fell by 11% in the two most recent reporting periods, yet the 27.69 million V shares still sold short still represent nearly a week's worth of pent-up buying power.

The security could also benefit from an unwinding of pessimism in the options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) Visa sports a 10-day put/call volume ratio of 0.86, which ranks in the 86th percentile of its annual range. This indicates that while calls still outnumber puts on an absolute basis, the rate of put buying relative to call buying has been quicker than usual.

Echoing this put skew is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.99, which ranks in the 91st percentile of its annual range. This shows that short-term traders have rarely been more put-heavy toward the security in the past year. 

This week, I'm looking for quantified evidence of a practice known as window dressing. Mutual funds and other large institutions disclose their holdings at the end of each quarter. Window dressing is when they buy high-flying stocks before the reporting period. Then, when someone views their holdings, they see these great stocks and conclude the managers had the foresight to be invested in them, not realizing their purchase was so recent. Similarly, the fund may sell off their duds to hide the fact they invested in such poor-performing stocks. Below, I look for evidence of window dressing, and then I list some stocks that might benefit or suffer because of it.

The Best Way to Use Window Dressing Stats

Going back five years, I looked at how S&P 500 Index (SPX) stocks performed in the last week of each quarter. I separated them into three groups of the best 50 stocks, worst 50 stocks, and others depending on their performance over the prior six months until the last week of the quarter. If the best performers over the past six months also perform the best in the last week, then that would be evidence of window dressing.

The first table below shows the average return in the last week of the quarter for S&P 500 stocks in the three brackets I mentioned above. The second table shows the percentage of stocks that outperformed the SPX. The only quarter in which I see much evidence for window dressing is the third quarter. Perhaps buying and selling in other quarters are driven by other factors. For example, the fourth-quarter activity could be driven by end-of-year tax considerations, and the same goes for the end of the first quarter -- which happens just before taxes are due in mid-April. 

The chart below shows the average return of the S&P 500 stocks in each bracket in each of the last five years. Our window-dressing theory looks reasonable in three of the five years. Last year and in 2015, however, the stocks that performed the best in the preceding six months did the worst in the final week of the quarter. In other words, if there's any edge here, it's minor. I would use the information as a confirmation on a short-term trade, or maybe as a tool for timing an entry on a long-term trade.

The Best and Worst SPX Stocks in the Past 6 Months

Based on the analysis above, below are a couple lists of stocks to watch for the remainder of the quarter. The first table shows S&P 500 stocks that have done the best over the past six months. The window-dressing theory says these stocks should do well here in the final stretch of the quarter. The second table of stocks are the worst performers over the past six months. These stocks could face selling pressure over the next week as portfolio managers unload them before the end of the quarter.

Healthcare stocks Align Technology, Inc. (NASDAQ:ALGN), Illumina, Inc. (NASDAQ:ILMN), and Eli Lilly And Co (NYSE:LLY) have put in tremendous technical performances this year, with all three trading near new highs. What's more, ALGN, ILMN, and LLY could be in store for even more upside next week, with data from Schaeffer's Senior Quantitative Analyst Rocky White suggesting "window dressing" could boost the outperforming stocks at the end of the third quarter.

ALGN Shareholders May Be Hedging With Put Options

Since taking a sharp bounce off its 140-day moving average in late April, Align Technology stock has added 63% to trade at $383.23. What's more, the shares are within a chip-shot of their Sept. 17 record high of $393.98, with the recent pullback from here contained by familiar support at ALGN's 20-day moving average.

Options traders have been bracing for a bigger retreat, per the stock's 10-day put/call volume ratio of 1.75 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which ranks in the 79th annual percentile. This indicates puts have been bought to open over calls at a faster-than-usual clip, though some of this could be at the hands of shareholders initiating an options hedge.

Options Bears, Shorts Target Surging Illumina Stock

Illumina has sailed to a nearly 60% year-to-date lead thanks to lifts from its 30-day and 40-day moving averages. While the stock is paring a portion of these gains today -- last seen down 0.8% at $348.06 -- its holding near its Aug. 31 all-time peak of $357.93, and finding a foothold atop its 20-day moving average.

Put buyers have also been busier than usual in ILMN's options pits, per the stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.25 -- in the 86th percentile of its 12-month range. Skepticism has ramped up elsewhere, with short interest up 26.4% in the two most recent reporting periods. This points to sideline cash available to fuel more upside.

Eli Lilly Stock Overdue for Bullish Brokerage Notes

Since dipping below the $75 mark last March, Eli Lilly shares have shot up 43% to trade at $106.81. The pharmaceutical stock hit an 18-year high of $107.84 on Sept. 10, with support just below at its 20-day moving average.

Analysts have been slow to react to LLY stock's surge up the charts, with six of 11 still maintaining a lukewarm "hold" rating. Additionally, the average 12-month price target of $98.29 is a nearly 8% discount to current trading levels. This leaves the door open for upgrades and/or price-target hikes, which could draw more buyers to Eli Lilly's table.

 

Shares of United Natural Foods Inc (NASDAQ:UNFI) are 2% lower at $33.34 in afternoon trading, as investors gear up for the company's fiscal fourth-quarter earnings report. The food distributor's results are slated to surface after the market closes tomorrow, Sept. 20. Below we will take a look at how UNFI has been faring on the charts, as well as what the options market is pricing in for the stock's post-earnings move.

United Natural Foods stock has been in a downward spiral of late, suffering two sizable bear gaps this calendar year. Plus, the formerly supportive 40-day moving average has switched to a ceiling of resistance. UNFI is down 32% year-to-date, and just last month touched a fresh annual low of $31.84.

Digging into its earnings history, UNFI has closed lower the day after reporting in five of the past eight quarters, including an unusual 14.3% drop in early June. Overall the shares have averaged a 4.7% move the day after earnings over the last two years, regardless of direction. This time around, however, the options market is pricing in a much larger-than usual 11.7% move for Friday's trading.

Looking toward analyst sentiment, those covering the stock have been unsurprisingly pessimistic. For example, of 16 firms, 12 carry "hold" or worse ratings. The underperformer may also be in store for a round of price-target cuts, as its average 12-month price target stands at a 34% premium to current trading levels at $44.93.

Lastly, short interest on UNFI fell slightly during its most recent reporting period, and now accounts for more than 10.6% of the stock's total available float. At the food distributor's average daily trading volume, it would take shorts more than two weeks to buy back their bearish bets.

AMC Entertainment Holdings Inc (NYSE:AMC) is higher in afternoon trading, as the stock continues its mid-year climb on the charts. Specifically, AMC recently broke above its 80-week moving average, and peaked at a fresh annual high of $21.30 on Sept. 14. What's more, the security has surged 34% year-to-date, and per data from Schaeffer's Senior Quantitative Analyst Rocky White, now seems to be an ideal time to bet on AMC stock's uptrend via call options.

That's because AMC stock's short-term options are attractively priced right now. This is per the security's Schaeffer's Volatility Index (SVI) of 44%, which ranks in the 13th percentile of its annual range -- suggesting near-term options are pricing in relatively low volatility expectations.

According to White, there has been one other time when the equity was trading within 2% of its annual high while its SVI was simultaneously perched in the 20th percentile of its 12-month range or below. After this prior signal, the shares were 11.6%  higher one month later. From its current perch of $20.25, a lift of this magnitude would put the equity at $22.60 -- a fresh annual high.

Meanwhile, near-term options traders seem to be quite skeptical toward AMC, based on the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.25, which ranks in the 89th percentile of its annual range. In other words, short-term traders have rarely been more put-heavy toward the security during the past year.

Lastly, short interest on AMC fell 15.8% during the most recent reporting period, but still represents a healthy 24.1% of the stock's total available float. A continuation of this short-covering trend could easily fuel additional upside in the days ahead. At the movie theater stock's average daily trading volume, it would take the shorts nearly eight days to buy back all of their remaining bearish bets.