Monday, 4th October, 2021
1/ Markets move lower to open the fourth quarter
2/ Tesla deliveries encourage investors
3/ Whistleblower report scares Facebook investors
4/ The bottom line
1/ Markets Move Lower to Open the Fourth Quarter
Major indexes booked losses to start the week as rising bond yields continued to put pressure on the technology sector. Invesco’s tech-heavy Nasdaq 100 ETF (QQQ) led the way lower, falling nearly 2%. State Street’s S&P 500 Index ETF (SPY) shed 1.3%, while State Street’s Dow Jones Industrial Average ETF (DIA) and the iShares Russell 2000 ETF (IWM) fell 1% each.
Investors appear to still be concerned about the pressures of inflation and possible tighter monetary policy, as cyclical sectors and value stocks are outpacing, while technology and growth stocks are underperforming. The energy sector continues to rise amid increasing oil prices.
The chart below compares the recent performance of the S&P 500 Index (SPX) with Cboe’s Volatility Index (VIX). The VIX is a measure derived from SPX option prices. When SPX option prices are lower because traders expect smaller SPX price changes in the future, the VIX is low, and vice versa when SPX option prices are higher. As a result, the SPX and VIX generally have an inverse relationship.
The SPX fell 4.8% in the month of September, and while the VIX remains at a relatively elevated level, it hasn’t risen in direct proportion with SPX. This could mean that while SPX has recently fallen, option traders are still placing bets that SPX will move to the upside.
2/ Tesla Deliveries Encourage Investors
On a day where tech stocks were battered, the share price of Tesla (TSLA) rose after the company reported that it had delivered a record number of electric cars in the third quarter, beating Wall Street estimates. Analysts predicted that TSLA would deliver around 220,000 vehicles for the quarter and the company delivered 241,000.
TSLA stock rose 2.5% in premarket trading before retracing a bit as the session wore on. The share price continues to trade above the 20-day moving average, as illustrated on the chart below. The share price had only briefly fallen below the moving average in mid-September.
Heading into today’s trading, call option open interest had fallen to a relatively low range compared to the past 52 weeks. Open interest had skewed toward puts, with 2.9 million in the open interest compared to 2.4 million calls. However, Monday’s trading volumes favored calls over puts, with over 60% of the options traded as calls.
Over the past five days, the put/call ratio has been dropping, signaling that more traders believe the share price will continue to rise in the near term.
3/ Whistleblower Report Scares Facebook Investors
Social media giant Facebook (FB) had a rough day. The company’s share price fell more than 5% after a Sunday night national broadcast featuring a whistleblower’s allegations. Among other things the report alleged that FB placed profits before safety and has been deceiving investors about its misinformation and hate speech practices.
The hits kept on coming for the company, as a widespread outage affected nearly all of Facebook services, including its eponymous social network, WhatsApp, and Instagram. FB also filed a motion to dismiss the Federal Trade Commission’s amended antitrust lawsuit against the company, saying the FTC’s complaint lacked evidence FB violated antitrust laws.
Share prices have fallen below a level that is a multiple of three times its Average True Range (ATR), as shown on the chart below. Despite this, it appears option traders are positioned for the stock to rise in the future. Headed into the trading session, FB had 1.1 million calls in the open interest compared to nearly 948,000 puts. Trading volumes also favored calls over puts—nearly 273,000 calls to over 229,000 puts.
Over the last five trading days, the put/call ratio has risen 1.8%, but the overall sentiment remains bullish, with calls representing 68% of total option trades.
4/ The Bottom Line
Investors sold enough shares to retrace all of Friday’s gains. TSLA shares closed higher on good news, but FB sold off strongly after bad news.
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Originally posted on 4th October, 2021
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