Chart Advisor: Powell Stays

Monday, 22nd November, 2021

1/ Indexes rethink prices as Biden re-nominates Powell 

2/ Apple holds on to last week’s gains 

3/ Home Depot investors hold position 

4/ The bottom line

1/ Indexes Rethink Prices as Biden Re-nominates Powell

Major averages appeared to be poised for significant moves to the upside shortly after the market opened. State Street’s S&P 500 Index ETF (SPY) and Invesco’s Nasdaq 100 ETF (QQQ\) raced out of the open to mark new highs intraday. However, after the first two hours the indexes sold off as investors booked profits.

The move to the downside coincided with President Biden’s nomination of Jerome Powell to continue in his capacity as Chair of the Federal Reserve. The announcement prompted a rise in bank stocks and treasury yields. The increase in yields could have been what prompted a selloff in the technology sector, as higher yields make high-debt technology stocks less attractive to investors. 

The chart below illustrates the intraday moves of SPY and QQQ. After opening significantly higher, markets sold off and remained lower. It’s interesting to note that QQQ, which has been in a relative upward trend of late, sold off more aggressively than SPY. This could be because of the increase in treasury yields but could also be a temporary pullback before making the next moves higher.  

2/ Apple Doesn’t Wipe Out Last Week’s Gains 

Apple (AAPL) stock has been on a tear of late, having gained 9% over the past five days. The recent upward trend has AAPL trading in an extreme high range, well above its 20-day moving average, as illustrated on the chart below. AAPL reached a new high today, which is no small feat considering its market cap is well over $2 trillion. The recent share price increase indicates that investors are bullish toward AAPL in the near term.

Option traders appear to be positioned for the stock to pull back a bit from recent highs. At first glance that doesn’t seem to be the case, as the open interest for AAPL features 4.4 million call options compared to 3.7 million put options. Recently, the trading volume of call options has exceeded the ratio of put options by 3-to-1. 

However, it is the implied volatility that paints a deeper picture. Implied volatility suggests that option traders are selling call options more often than buying them. This may indicate a bearish outlook toward AAPL stock, or it might be investors who want to sell covered calls as a way of banking profits at years end. 

AAPL’s open interest is relatively light compared to its 52-week average. Additionally, the open interest for put options basis remains nearly five times as high as for call options. This could mean that option traders are looking at the recent run up in AAPL’s price as the top for the near term.  

3/ Home Depot Investors Hold Position 

In a similar vein to Apple, Home Depot (HD) stock today spiked to significant intraday highs. HD stock has broken out above the extreme high of its volatility range, as depicted on the chart below. HD has been trading above its 20-day moving average since mid-October and has been trending higher after reporting earnings in mid-November.  

Option trader opinion toward HD appears to be mixed. Looking at options expiring this week, traders appear to be buying puts and selling calls. Comparing that with options expiring next week, the data shows the opposite. Traders could be buying call options for next week in anticipation of a short-term share price increase before HD offers its dividend. 

HD’s open interest features 142,000 calls compared to 163,000 puts. Monday’s trading volumes leaned bullish, featuring 26,000 calls to 19,000 puts. HD’s open interest is down 22% over the last five days, which is typical for a stock that has recently reported earnings. In that time frame, put option open interest remains slightly higher than usual on a percentage basis compared to its 52-week average. This suggests that investors are using options to protect the recent gains they have booked since the last earnings announcement. 

4/ The Bottom Line 

Stocks reversed midday after the Biden administration suggested that Jerome Powell continue as Chairman of the Federal Reserve. Both AAPL and HD shares held on to a small portion of their gains, even as option buyers positioned themselves for the possibility of downward moves.  

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Originally posted on 22nd November, 2021