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Chart Advisor: Inching Higher

Posted November 12, 2021 at 2:26 am
Gordon Scott

Thursday, 11th November, 2021

1/ Investors digest data keeping volatility elevated 

2/ Fallout from a bigger-than-expected loss 

3Option traders pessimistically trading AstraZeneca 

4/ The bottom line

1/ Investors Digest Data Keeping Volatility Elevated 

With bond markets closed for the Veterans Day holiday, major averages moved cautiously higher, as the market continues to digest hot inflation data. iShares’ small-cap focused Russell 2000 ETF (IWM) led the way higher, adding 0.8%. Invesco’s tech-heavy Nasdaq 100 ETF (QQQ) gained 0.3%, a day after being punished by surging bond yields. State Street’s S&P 500 Index ETF (SPY) rose 0.1% while State Street’s Dow Jones Industrial Average ETF (DIA) fell 0.3%. 

The chart below illustrates the recent moves of the S&P 500 Index (SPX) with Cboe’s Volatility Index (VIX). The VIX represents the market’s expectations for the relative strength of near-term price changes of SPX. Derived from SPX option pricing, the VIX generates a forward projection of volatility, and is often seen as a gauge of market sentiment. Therefore, the VIX is sometimes referred to as the “fear index”. 

SPX and VIX have an inverse correlation. When the market is falling, volatility tends to rise, and vice versa. SPX has been on a recent upward trend since mid-October. The VIX, meanwhile, hasn’t retreated at the same relative pace. Even with SPX recently setting new highs, volatility was rising instead of falling. This could mean that investors have been wary of the sustainability of recent highs.  

2/ Fallout From a Bigger-Than-Expected Loss 

The share price of Beyond Meat (BYND) gapped lower after the company announced disappointing third-quarter earnings results. Analysts expected the plant-based meat maker to announce a net loss of $0.39 and $106.1 million in volume. BYND reported a net loss of $0.87 and $106.43 million in volume. The wider-than-expected loss resulted in BYND receiving several price target downgrades, causing BYND shares to fall 14%. 

The chart below compares the recent performance of BYND with State Street’s Consumer Discretionary Sector ETF (XLY). Over the past year, BYND has greatly lagged its sector, as BYND has fallen 36% in that time frame while XLY has added 32%. This comes as rising inflation indicators could cause a slowdown in growth of XLY.  

Chart watchers should recognize that BYND’s earnings-based share price decline has resulted in a 52-week low. While this could provide an opportunity for a short-term reversal, BYND’s gloomy outlook for the fourth quarter may result in further downside soon.  

3/ Investors Option Traders Pessimistically Trading AstraZeneca 

Astrazeneca (AZN) will report fiscal third-quarter earnings on Friday. Analysts are forecasting that the drug manufacturer will announce $1.25 in earnings per share (EPS) to go with $9.58 billion in revenue. Investors will be watching to see how AZN’s newer medicines and COVID-19 vaccines have driven the company’s top line in the quarter.  

Option traders appear to be positioned for the stock to move lower in the near term. The open interest for AZN features over 194,000 call options compared to 122,000 puts. This would normally be considered bullish. However, relative to average levels over the last 52-weeks for the put option open interest is much higher than usual. Call options, despite being greater in number than puts, are currently at a lower-than-average level in the open interest.  

For options expiring Friday, the day that earnings are announced, the $56 put has the highest open interest. This option represents an 11% downside to the current price of AZN stock and is a bearish outlook toward AZN earnings.  

4/ The Bottom Line 

Stocks moved cautiously higher with the bond market closed. BYND shares fell lower after the company reported disappointing earnings. Option traders expect a similar reaction when AstraZeneca reports on Friday. 

Originally posted on 11th November, 2021

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