Markets on a roll

04/24/19
  • SPX surpassed its September 2018 high close, setting a new record
  • History shows high probability of next-day follow-through
  • As crude oil surges, so does options trading in energy stock on verge of earnings

Finally.

After a seven-month slog and a wicked 20% correction, the S&P 500 (SPX) yesterday closed at its highest level ever, topping its former record close from September 20, 2018:

Cenovus Energy (CVE), 10/19/18–4/23/19. Cenovus Energy (CVE) price chart. Recent breakouts.

Source: Power E*TRADE


It didn’t quite reach the all-time intraday high of 2,940.91 it hit one day later on September 21, but based on hundreds of similar new highs the index has made over the years, the odds of upside follow-through today appear better than average.

Aside from being a record closing price, yesterday was also, specifically, a new 147-day high close for the SPX. Here’s what happened the day after  the SPX’s 699 other 147-day new high closes since 1960:

1. The SPX closed higher on 576 of these days (82.5% of the time).

2. Its average gain was 0.51%.1

Not impressed? Well, the SPX’s average daily return over the past 20 years is only 0.03%, and the index closed higher 53.3% of the time.

Texas tea time

Upside momentum hasn't been limited to the stock market. It may not be at record levels, but yesterday June WTI crude oil futures pushed to $66.60/barrel—up more than 40% on the year, and the highest the market has been since last Halloween.

The rally has, not surprisingly, lit the fuse under many oil-related stocks in recent weeks. One you may not have heard of is Cenovus Energy (CVE), a Canadian oil company that fell to an all-time low of $6.15 on December 26 but has since rallied nearly 70% to get back above $10/share:

Cenovus Energy (CVE), 10/19/18–4/23/19. Cenovus Energy (CVE) price chart. Recent breakouts.

Source: Power E*TRADE


Aside from its recent bullish momentum, two really interesting things about CVE: The company releases earnings today, and yesterday option traders were piling into CVE options.

Total CVE options volume was more than 10 times its typical level early in yesterday’s trading session, around 147,000 contracts vs. an average of approximately 14,500:

LiveAction scan: Unusual options volume, 4/23/19. Unusual Cenovus Energy options activity. More than 10 times average CVE options volume.

Source: Power E*TRADE


Later, CVE options volume was more than 15 times average—more than 220,000 contracts. But you had to sift through the numbers a bit to get a feel for what was going on. While a large chunk of the volume (around 110,000 contracts) occurred in the June $12 call options, the open interest (the number of unclosed positions) in this contract was only around 10,000—which means the vast majority of the volume consisted of traders closing existing trades, not opening new ones.

The more important action appeared to be in the May $10 and $11 call options, which had total volume of more than 73,000 contracts and open interest of around 107,000 contracts, which suggests traders were still getting into these options.

So, although someone is always on the opposite side of every trade, at least some traders yesterday were scooping up CVE call options—which can increase in value if the underlying market rallies—on the eve of earnings, and amid an upswing in the crude oil market that was unfolding as the White House announced it was ending a waiver program that allowed some countries to buy oil from Iran.2

In other words, crude oil appeared to jump because supply was expected to shrink because Iran would be contributing less to the global market.

That’s the type of thing that can move markets.

Market Mover Update: The health care sector jumped from worst to first in the S&P 500 (SPX) rankings yesterday, gaining more than 1.5%; Humana (HUM) and Johnson & Johnson (JNJ) both rallied more than 1%. Aerospace and defense stocks shot to the upside yesterday, with Lockheed Martin (LMT) soaring more than 6% after releasing earnings, Northrop Grumman (NOC) rallying more than 4%, and Raytheon (RTN) gaining more than 2%.

The Nasdaq 100’s (NDX) breakout to new highs is more than official now, as the tech index notched its second straight day with a record high and a record close—the first time it’s done that since last July.

Today’s numbers (all times ET): EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: AT&T (T), Biogen (BIIB), Boeing (BA), Boston Scientific (BSX), Caterpillar (CAT), Northrop Grumman (NOC), T-Mobile US (TMUS), Thermo Fisher (TMO), Advanced Micro (AMD), F5 Networks (FFIV), Facebook (FB), Lam Research (LRCX), Microsoft (MSFT), PayPal (PYPL).

 

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1 Document available upon request.

2 Bloomberg. Oil Market Confounded Again as Trump Surprises on Iran Sanctions. 4/22/19.

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