Dips vs. pullbacks

12/01/22
  • WWE up roughly 60% this year after flat 2020 and 2021
  • January call options volume jumped on Wednesday
  • Current dip significantly smaller than average 2022 pullback

A bear-defying rally, recent year-to-date highs, and heavy call option volume.

It may sound like bulls are on the move, but one example illustrates why some traders would exercise caution in this type of situation.

World Wrestling Entertainment (WWE) landed on the LiveAction scan for unusual call volume on Wednesday, with calls trading at more than 22 times their average daily pace:

Chart 1: LiveAction scan: Unusual call volume, 11/30/22. Call volume more than 22 times avg.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Traders who have paid attention to WWE this year may not have batted an eye at this type of activity. After underperforming the broad market in 2020 and 2021, the stock has steadfastly ignored this year’s downtrend, racking up a 60%-plus year-to-date gain as of yesterday.

On Wednesday morning, WWE was actually in its second day of pulling back from its latest new high for the year (its highest high since May 2019, in fact)—which, given a burst of potentially bullish-looking call volume, may have prompted some traders to consider buying the dip.

Other traders may have been more cautious, for a very simple reason. At yesterday’s low of $78.01, WWE had pulled back 3.5% from Monday’s close:

Chart 2: World Wrestling Entertainment (WWE), 12/31/22–11/30/22. World Wrestling Entertainment (WWE) price chart. Defied 2022 downtrend.

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)


The chart marks the lows of all of this year’s pullback that, like the current one, occurred after WWE closed at a new high for year.

If this week’s retreat looks smaller than the others, that’s not an optical illusion. The following table shows the average decline for the other nine pullbacks this year was -9.2%, and only one (No. 2, in February) was smaller than -5%:

Chart 3: WWE 2022 pullbacks. Current pullback smaller than average.

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)


One way to summarize the table: Each time WWE set a new closing high this year, it pulled back at least 4.5%—and as much as 12.7%—before rallying to a new high.

That in no way means the current pullback couldn’t be the smallest of the year—the stock could very well be trading at a new year-to-date high today or tomorrow. But this week’s downturn is, nonetheless, out of character with this uptrend’s other pullbacks—a reality some traders may wrestle with before deciding to enter the market.

Market Mover Update: Cybersecurity stock CrowdStrike (CRWD) fell more than 20% intraday on Wednesday after announcing earnings, but got a vote of confidence from Morgan Stanley & Co. analysts, who thought the sell-off dropped shares to a potentially attractive level.1

Thanks to yesterday’s rally amid Fed Chief Jerome Powell’s comments about the likelihood of smaller rate hikes, the S&P 500 ended November with a solid gain. It also marked the first time since August 2021 that the US market posted back-to-back up months.

Today’s numbers include: Challenger Job-Cut Report (7:30 a.m.), Weekly Jobless Claims (8:30 a.m.), Personal Income and Outlays (8:30 a.m.), PMI Manufacturing Index (9:45 a.m.), ISM Manufacturing Index (10 a.m.), Construction Spending (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Ambarella (AMBA), Big Lots (BIG), Ulta Beauty (ULTA), Designer Brands (DBI), ChargePoint Holdings (CHPT), Dollar General (DG), Kroger (KR), Zscaler (ZS), Ollie's Bargain Outlet Holdings (OLLI), Marvell Technology (MRVL).

 

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1 CNBC.com. Shares of CrowdStrike fall after ‘disappointing’ earnings, Morgan Stanley says buy the dip. 11/30/22.

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