Chart Advisor: Investors Pause

Monday, 15th November, 2021

1/ Investors wait for consumer data

2/ Home Depot traders pessimistic

3/ Walmart option traders grabbing call options 

4/ The bottom line

1/ Investors Wait for Consumer Data

Major averages remained relatively flat as investors await consumer spending data and earnings results from some of the nation’s largest retailers later this week. Making the largest move was the iShares Russell 2000 ETF (IWM), which fell 0.4%. Invesco’s Nasdaq-100 ETF (QQQ) and State Street’s S&P 500 Index ETF (SPY) and Dow Jones Industrial Average ETF (DIA) each remained flat.  

Bond yields crept up slightly, pushing down technology stocks and high-debt growth stocks, perhaps explaining the decline in the small-cap focused IWM. Focus will shift to mega-cap retail stocks reporting earnings this week, such as Walmart (WMT), Target (TGT), and Home Depot (HD). Investors will also get a further glimpse into how inflation is affecting the economy, with advance retail sales numbers reported on Tuesday.  

The chart below compares SPY with State Street’s Consumer Discretionary Sector ETF (XLY) and Consumer Staples ETF (XLP). Comparing these two sectors can give a good benchmark of “wants versus needs”, which can gauge the strength of the retail sector. During times of high inflation, XLP is considered safer than XLY, as consumers will spend more on things that they need.

XLY has recently moved lower relative to the rest of the market, while XLP is trending higher. As economic reports continue to emphasize growing inflation, it appears investors are rotating into XLP to hedge against inflation. If retail earnings are surprisingly poor and economic data continues to show rising inflation, this sector rotation could begin to pick steam, widening the gap between SPY and XLY.  

2/ Home Depot Traders Pessimistic 

Investors have slightly bid up the share prices of Home Depot (HD) ahead of the company’s fiscal third-quarter earnings announcement. Analysts expect the home improvement retailer to report $3.38 in earnings per share (EPS) to go with $34.87 billion in revenue.  

HD benefited greatly from the COVID-19 pandemic and a hot housing market. Many people found themselves at home more than normal, and sky-high home prices pushed many to improve their current house. This environment has helped HD stock gain 33% in the past year. Investors will be anxious to see if HD can retain lofty sales levels. 

Option traders appear to be positioned for the stock to fall in the near term. That’s because the total open interest for HD features nearly 176,000 put options compared to 140,000 call options. However, it should be noted that the open interest for options that expire Nov. 19, which include the HD earnings date, feature 40,000 puts compared to 29,000 calls.  

Out of the money put options also decline at a much slower rate than out of the money call options in the open interest. Put option open interest is higher than normal compared to the 52-week average, and implied volatility suggests traders are buying these options, reflecting a bearish sentiment toward HD earnings.  

3/ Walmart Option Traders Grabbing Call Options

Shares of Walmart (WMT) have drifted slightly lower ahead of the company’s fiscal third quarter earnings results, which are expected Tuesday before the market opens. Analysts expect the retail giant to announce $1.39 in EPS and $134.26 billion in revenue. While earnings and sales are expected to grow, investors will be looking to see how ongoing supply chain and labor issues will affect the bottom line.  

The chart below indicates how WMT shares have recently begun a slight downward trend from an extreme high of the volatility range, to trade under WMT’s 20-day moving average. This reflects traders’ bearish outlook toward the earnings report.  

Option traders are taking this opportunity to buy cheaper-than-normal call options. The open interest for WMT features over 465,000 call options compared to 298,000 puts. Recent trading volumes on Monday favor calls over puts nearly 2-to-1. 

While put open interest is higher than normal, and call open interest is below average, the Nov. 19 $150 call has the highest open interest of any single option, at 22,000. This represents a 2% upside to the current price of WMT stock and means that option traders appear to be bullish toward WMT earnings.  

4/ The Bottom Line 

Investors decided to take a rest from buying into the rebound, likely looking for key consumer data due Tuesday morning, as well as earnings reports from Walmart and Home Depot. 

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Originally posted on 15th November, 2021