What’s in store for surging stock?

  • PSA hit a nearly four-year high on Friday
  • Stock rallied in May while broad market sold off
  • Shares turned lower yesterday amid heavy call options trading

A good way for a stock to grab some attention is to diverge from what the market is doing, for no apparent reason.

Public Storage (PSA), an S&P 500 (SPX) company that owns and manages—you guessed it—public storage facilities, threw up a couple of interesting flags yesterday. First, it was down around -1% midday when the SPX was up around 0.8%, and second, a Power E*TRADE LiveAction scan showed it had more than 28 times its average call options volume. Sounds a little counterintuitive, but let’s see.

The chart below shows PSA was underperforming the SPX this year until mid-May, at which point the stock kicked into overdrive as the S&P slid into a trade-induced funk. The SPX began closing the gap at the beginning of June, but PSA kept rallying, too, reaching its highest point since late-July 2016 ($247.63) last Friday:

Public Storage (PSA) and S&P 500 (SPX), 12/31/18–6/10/19. Public Storage (PSA) price chart, SPX price chart. PSA bucked May downturn

Source: Power E*TRADE

PSA’s recent market-bucking surge may seem like it came out of nowhere, but remember that real estate is a defensive sector, and investors were definitely getting defensive last month. Even yesterday—a week into the market rebound—real estate was still the second-strongest S&P 500 sector over the past 30 days, up around 2.8% vs. only 0.5% for the SPX. So, it’s a good guess some of that PSA buying came courtesy of investors rotating into defensive areas of the market as the May downturn picked up steam.

On the other hand, PSA was already up 9% on the year at the end of April, so it wasn’t as if bulls had totally ignored the stock up to that point.

And what about that call options volume? Well, it was concentrated in near-the-money (i.e., close to the current strike price) contracts expiring late next week, and a big chunk of it appeared to be liquidations—that is, traders who had been long calls were selling them. There was very little activity in more distant options that may have suggested traders were taking longer-term bullish positions.

All of which presents the following possibility: A stock that has been moderately bullish this year gets an extra defensive boost from a sharp market downturn that propels it to an attractive selling level for existing longs and perhaps some near-term short sellers—hence yesterday’s downturn during a broad-market rally and the possible liquidation of long call options positions.

In other words, in the absence of an imminent fear-inducing sell-off (which can never be ruled out), there may be more rotation out of defensive stocks that have gotten bid up in recent weeks. PSA may be embarking on a long-term uptrend—who knows?—but some traders may also see it as a candidate for a cool-down.

Public Storage (PSA), 6/18/18–6/10/19. Public Storage (PSA) price chart. Possible support?

Source: Power E*TRADE

What could a PSA pullback look like? As is often the case, traders often look for markets to test prominent price points or breakout levels when they dip. The following chart shows two representative levels, the June 2018 high, which the stock just pushed above in May, and the August 2018 and March 2019 highs.

Even the longest of long-term investors has to sell at some point, and for traders, those decisions can come earlier and more often, if opportunities present themselves.

Market Mover Update: Chip stocks did their part in lifting the market yesterday: The PHLX Semiconductor Index (SOX) extended its rebound off support by rallying more than 3%, while AMD jumped more than 5% to its highest level since May 2006. Beyond Meat (BYND) followed up on Friday’s 41% explosion by rallying more than 20% yesterday, trading as high as $186.28.

Today’s numbers (all times ET): Producer Price Index (PPI), 8:30 a.m.

Today’s earnings include: H&R Block (HRB), HD Supply Holdings (HDS), Casey's General (CASY), Dave & Busters (PLAY), RH (RH).

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