Chart Advisor: Ceiling Lifted

Thursday, 7th October, 2021

1/ Stocks move above resistance as debt ceiling fears abate 

2/ Investors optimistic for Levi Strauss

3/ Energy sector lifts Occidental

4/ The bottom line

1/ Stocks Move Above Resistance as Debt Ceiling Fears Abate 

The mid-week rally continues, as indexes rose higher after lawmakers reached a deal to increase the debt ceiling in the short-term. State Street’s S&P 500 Index ETF (SPY), Invesco’s Nasdaq 100 Index ETF (QQQ) and State Street’s Dow Jones Industrial Average ETF (DIA) all rose 1%. iShares Russell 2000 ETF (IWM) led the way higher, gaining 1.6%. As markets peaked intraday, selling appeared to take hold late in the session. However, after a volatile start to the month, the major averages are in the green for this week. 

Unemployment claims came in lower than expected, perhaps driven by the ending of enhanced benefits. Initial filings for unemployment was 326,000 last week, below the 345,000 analysts predicted.  

Despite Congress relaxing short-term debt ceiling fears, the specter of inflation looms over equities. Combined with supply chain constraints, inflation could influence consumers into spending less in the near term. Below is a comparison of SPY with State Street’s Consumer Staples Sector ETF (XLP) and Consumer Discretionary Sector ETF (XLY).  

Comparing the two sectors can give a good benchmark of “wants versus needs,” which can gauge whether the retail sector is likely to have a good fourth quarter. XLY remains barely ahead of XLY, with the gulf between the two having closed significantly. Supply chain issues continue to plague both sectors, but XLY remaining ahead of XLP could indicate retail sales may perform better than expected.  

2/ Investors Optimistic for Levi Strauss 

Investors bid up the share price of Levi Strauss & Co (LEVI) after the company announced fiscal third-quarter earnings results. LEVI reported $0.48 in earnings per share (EPS) and $1.5 billion in revenue, both beating Wall Street expectations of $0.37 in EPS and $1.48 billion in revenue. LEVI credited the back-to-school season and new denim trends for an increase in consumer demand. The company shook off supply chain bottlenecks due to its diversified manufacturing. As a result, LEVI shares rose 9%.  

Many apparel companies have been hard hit by global supply chain constraints. Below is a comparison between the recent performance of LEVI, Macy’s (M) and State Street’s Retail Sector ETF (XRT). While today’s move to the upside places LEVI above its 20-day moving average, it’s roughly in-line with its sector.  

Macy’s, meanwhile, enjoys a comfortable lead on both, bolstered by a 19% rise after reporting earnings in August. The retail sector has had a rough month, but XRT has risen 44% year-to-date. In the same span, LEVI and Macy’s have added 44% and 100%, respectively.  

3/ Energy Sector Lifts Occidental  

Oil prices have been on the rise of late, leading to a bull run in the energy industry. The S&P 500 (SPX) experienced a 2.4% loss in the past month, while State Street’s Energy Sector ETF (XLE) has risen 13% in the same time span. This sector-wide increase has given rise to many individual equities, including Occidental Petroleum (OXY). OXY has gained 26% in the past month, and option traders appear to be positioned for the price to continue to rise in the near term.  

As investors have bid the share price of OXY to an above-average range, call options dominate the open interest more than 2-to-1, or over 700,000 calls compared to nearly 327,000 puts. Recent trading volumes also favor call options, as nearly 35,000 calls were traded compared to less than 15,000 puts on Thursday.  

For Oct. 15, which is the next monthly expiration date for options, the largest open interest is on the $27 call. This option is significantly in the money, as is the next most popular option—the $30 call. With heavy open interest at and further out of the money, if oil prices remain at an elevated level and the share price of OXY continues to rise, there could be significant pressure on OXY for a gamma squeeze.  

4/ The Bottom Line 

Indexes jumped today on news that the debt ceiling crisis has been temporarily resolved. The old saying that a rising tide lifts all ships, certainly seems to apply as both LEVI and OXY shares were on the rise after earnings. 

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Originally posted on 7th October, 2021