Metal spike

01/08/20
  • CMC surged, then sank after Monday’s earnings report
  • Company topped headline earnings, missed on other metrics
  • Stock formed a fairly rare price pattern

Anyone who has followed stocks for a while is likely familiar with the fun-house mirror aspect of earnings releases. Company A tops its numbers and tanks, Company B comes up short and soars. You never know.

Besides balancing the headline earnings and revenue numbers with other performance metrics (sales, subscriber growth, etc.), traders also have to consider the forward guidance the company offers, and how all of the above measure up to Street expectations.

It can be quite a knot to untangle, especially in the immediate aftermath of an announcement. With that in mind, take a look at the impressive spike industrial metals manufacturer and recycler Commercial Metals (CMC) made on Monday after releasing its numbers:

Chart 1: LiveAction scan: Big one-week IV loss, 1/7/20. Implied volatility dropped 33%.

Source: Power E*TRADE


Below the headlines, CMC’s sales were below estimates, and the company seemed to offer a positive but cautious forward outlook, anticipating “resilient” construction and infrastructure demand, but a tightening of margins from Q1 levels.2 That’s a lot to unpack, as the stock’s gyrations testify. Yesterday CMC rebounded more than 2.5% intraday, but was still well below Monday’s high of $24.04.

Rather than try to further decipher the tea leaves, some traders may ask a simple question: What has CMC stock done after similar price moves in the past?

The gist of the past three days of price action is that CMC made a very big up move on Monday, sandwiched between days with much lower highs—i.e., it formed a “spike” high. Also, it closed down on the spike day. Here’s one way to define that pattern:

1. Price makes at least a 10-day (two-week) high.

2. That day’s high is at least 2% above the highs of the days immediately before and after it.

3. The day closes below the previous day’s close.

CMC has made similar moves 29 other times since 1980, most recently on June 1, 2018. Here’s what things looked like 10 trading days later:

1. The stock was lower 20 out of 29 times.

2. The average return was almost -1%.3

To put those numbers in context, since April 1980 CMC has closed higher in 52% of all 10-day periods, with an average return of +0.63%. So, the stock’s bearish bias after the spike-day pattern is, at the very least, out of the ordinary.

Finally, it bears mentioning that CMC appeared yesterday on a scan for symbols with the biggest implied volatility (IV) declines from the week before:

Chart 2: Commercial Metals (CMC), 11/5/19–1/7/20. Spike-day pattern.

Source: Power E*TRADE


All else being equal, lower IV often translates into lower options prices. But traders looking to buy CMC options because they may be relatively “cheap” should remember that IV typically gets inflated in the runup to an earnings release.

In other words, CMC options weren’t necessarily bargains yesterday, and calls may have been potentially pricey, since the stock was poised to close at its highest level since July 2018, despite its retreat from Monday’s high. That means calls may have been more attractive to sellers (traders expecting the stock to decline) than buyers (those expecting the stock to rally).

Market Mover Update: Aerojet Rocketdyne AJRD) exploded another 6% yesterday, bringing its three-day gain to more than 10% (see “Bulls in space”).

Today’s numbers (all times ET): ADP Employment Report (8:15 a.m.), EIA Petroleum Status Report (10:30 a.m.), Consumer Credit (3 p.m.).

Today’s earnings include: Walgreens Boots Alliance (WBA), Bed Bath & Beyond (BBBY), Constellation Brands (STZ), Lennar (LEN).

 

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1 StreetInsider.com. Commercial Metals Company (CMC) Earnings. 1/6/20.

2 MarketWatch. Commercial Metals's stock surges after profit rises above expectations, but sales comes up shy. 1/6/20.

3 Supporting document available upon request.

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