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Chart Advisor: Signs of Nervousness

Posted November 3, 2021 at 3:19 am
Gordon Scott

Tuesday, 2nd November, 2021

1/Stocks notch new highs amid volatility risk

2/ Pfizer vaccine boosts revenue

3/ No shortage of buyers 

4/ The bottom line

1/ Stocks Notch New Highs Amid Volatility Risk

Stock indexes moved incrementally higher on subdued price action. That kind of activity is normally accompanied by volatility prices moving lower, but today’s session didn’t pan out that way. 

The chart below compares the S&P 500 Index (SPX) with the Cboe Volatility Index (VIX) and the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ). In this comparison, experienced chart watchers look for divergences between the volatility lines and the benchmark index. Because stock prices and volatility prices are most often inversely correlated, chart readers would expect to see volatility prices hit new lows if stock prices hit new highs.  

Over the past several days, a very significant divergence has taken place where VIX and VXZ pricing has kept from pushing lower. This means that professional option traders are baking in more cost to trade options. They usually do this when they are worried about the risk of unexpected price movement, so today’s action makes a chart watcher wonder what they are worried about. 

2/ Pfizer Vaccine Boosts Revenue

Pfizer (PFE) shares rose 5% after the company beat analyst expectations for revenue and earnings per share (EPS) in the company’s fiscal third-quarter earnings announcement. Analysts expected the pharmaceutical giant to announce $1.03 in EPS and $21.9 billion in revenue. PFE reported $1.34 in EPS and $24.1 billion in revenue, with approximately 61% of this revenue from vaccine sales. The company raised its full-year 2021 guidance for revenue and EPS.  

The chart below compares the recent performance of PFE with State Street’s Healthcare Sector ETF (XLV). Recently, PFE had been relatively in line with XLV. However, today’s earnings-based share price increase places PFE ahead of its sector.  

While the effects of the COVID-19 pandemic have been shrugged off by many stocks amid the economic recovery, PFE benefited greatly by being one of the main providers of a COVID vaccine. In the past year PFE shares have gained nearly 35%, compared to a 30% rise in XLV in that same span. As the world continues to exit the pandemic, PFE will either need to replace its vaccine-based revenue stream or adjust revenue expectations accordingly.  

3/ No Shortage of Buyers 

Investors bid up the share prices of Avis Budget Group (CAR) after the company exceeded EPS expectations for the third quarter. Analysts expected $6.87 in EPS and CAR announced $10.74, beating analyst estimates by more than $4. With revenue above expectations and CAR’s board authorizing $1 billion in share buybacks, investors piled in, sending share prices skyrocketing up more than 100%. Trading in the stock was halted multiple times Tuesday, and it was up more than 200% at one point.  

Ahead of the earnings report, an abnormally high percent of CAR’s float was sold short. When a short-sold stock rises, short-sellers are forced to mitigate their losses by buying shares, which creates even further upward pressure on the share price. This is known as a short squeeze.  

Retail investors have used social media sites to accelerate short squeezes, such as the infamous large moves of stocks GameStop (GME) and AMC (AMC). CAR may have benefitted from larger-than-normal retail trader involvement, as the company’s shares saw over 18 times its average trading volume on Tuesday. But there also might be something more to the story. 

Consider the following chart comparing CAR and Tesla (TSLA) shares. Since the beginning of last year, the rise of TSLA shares has been nothing short of dramatic. Chart watchers are left to ponder whether the movement of CAR shares is also reflective of a new valuation for the vehicle industry in general. 

4/ The Bottom Line 

Stocks trudged higher but volatility indexes didn’t fall to new lows suggesting that knowledgeable traders are concerned about the risk of falling stock prices. However, those investing in PFE, TSLA, or CAR don’t seem to be worried about that at all. 

Originally posted on 2nd November, 2021

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