Chart Advisor: Jobs Numbers Disappoint

Friday, 8th October, 2021

1/ Indexes closed with mild losses after jobs report 

2/ J.P. Morgan Chase sets up as earnings season approaches 

3/ Wells Fargo traders anticipate good news 

4/ The bottom line

1/ Indexes Closed with Mild Losses After Jobs Report  

Major indexes posted minor losses, trading relatively flat after momentum built by a deal to raise the debt ceiling was dashed by a lackluster jobs report. The largest move came from iShares Russell 2000 ETF (IWM), which fell 0.7%. Invesco’s Nasdaq 100 ETF (QQQ) fell 0.5%, while State Street’s S&P 500 Index ETF (SPY) fell 0.2%, and the Dow Jones Industrial Average ETF (DIA) traded relatively flat. It appeared indexes would close a volatile week with a steep sell off. However, buyers stepped in to help major averages all finish green for the week.  

Numbers from the Bureau of Labor Statistics’ nonfarm payroll report came in lower than expected. Payrolls rose by only 194,000 in September, well below the 490,000 expected by Wall Street analysts. On the plus side, the unemployment rate fell to 4.8%, lower point than the 5.1% predicted.  

Job numbers have remained at the center of the Federal Reserve’s plan to slow its purchases of $120 billion of bonds per month. The U.S. 10-Year Treasury (TNX) rose to 1.6% but did not have the same drastic effect on technology stocks as it did the last time it rose. This could mean that traders are still optimistic toward growth companies, even as inflation looms. 

The chart below illustrates the recent performance of the four major averages. After a downtrend in September, and a period of consolidation to start the month, indexes have increased to start the quarter. A continual period of higher lows could mean that higher highs are possible going forward.  

2/ J.P. Morgan Chase Sets Up as Earnings Season Approaches 

The open interest for J.P. Morgan (JPM) is rising ahead of the company’s fiscal third-quarter earnings announcement. Investors have recently bid JPM share prices to an above average range. However, it appears option traders are positioned for the stock to fall in the near term. The current open interest on put options is higher than normal over the last 52 weeks, while the open interest on call options is weaker than usual over the same time span.  

JPM’s open interest features over 636,000 puts compared to over 482,000 calls, demonstrating the bias that option traders have. Friday’s trading volumes did skew toward calls, as 63% of total contracts traded were call options. This could be because JPM opened strong to start the trading session before fading the rest of the day.  

For Oct. 15, which is the next monthly expiration date for options, the largest open interest is on the $170 call. At current levels this option is in the money. It should be noted that for options at or close to the money, the $170 and $172.50 puts have an increase in open interest but a decrease in implied volatility, suggesting that traders are selling more contracts on short positions than buying. So, while the open interest skews toward put options, if these contracts are being sold, it would reflect a bullish sentiment toward JPM earnings, which are due to be reported Wednesday before the market opens.  

3/ Wells Fargo Traders Anticipate Good News 

Investors have also slightly bid up the share price of Wells Fargo (WFC), which is also reporting earnings next week. The share price is in an above average range, trading above its 20-day moving average. Recent trading volumes lean heavily toward calls, as calls outnumbered puts more than 4.5-to-1 in today’s trading.  

The open interest also favors call options, albeit slightly—1.4 million calls compared to 1.2 million puts. This number of puts is relatively higher than usual over the past 52 weeks, while the number of calls is lower than normal. However, the put/call ratio is in line with the 52-week average.  

The option with the highest open interest for Oct. 15 is the $50 call option. This option is currently out of the money, which means most option traders see a potential 4% upside for WFC around earnings. Implied volatility is falling for put options, which could mean that more of these options are being sold than bought, which would translate into a bullish sentiment toward WFC. The option straddle is currently implying a 4.5% move based on earnings, which WFC will report on Oct. 14 before the market opens.   

4/ The Bottom Line 

Stock indexes retreated a bit based on disappointing jobs numbers; it seems apparent that the economy may still be recovering, even if it is progressing more slowly than anticipated. Traders are poised for opportunity in JPM and WFC, two companies reporting early in the earnings season. 

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Originally posted on 8th October, 2021