Stock weakness, sector strength

02/11/22
  • Financials one of two positive stock sectors so far this year
  • Many names at or near record highs despite broad-market weakness
  • Certain fintech stocks set longer-term lows in January

When the market tide isn’t lifting all boats, some traders and investors focus on pockets of relative strength, while others may try to identify potentially oversold stocks.

The financial sector may have attracted both groups lately. It’s the only S&P 500 sector besides energy with a positive year-to-date return, and with interest rates rising, more traders and investors may be attracted to companies that stand to benefit from that paradigm. But they also present a bit of a Catch-22, since many of the high-profile names are trading at or near record highs.

In other words, there’s been a fair amount of relative strength in financials lately, but not necessarily a wide range of choices for the bargain-hunting crowd.

One exception: PayPal (PYPL), which has trended lower since last July and fell to its lowest level since April 2020 after offering disappointing guidance in its February 1 earnings announcement.1 The stock tumbled 25% on February 2 and slid another 10% through Thursday:

Chart 1: PayPal (PYPL), 12/10/21–2/10/22. PayPal (PYPL) price chart. Earnings sell-off.

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


Although it may still be best known as eBay’s former payment processor (the two parted ways last year), PYPL is part of the “Buy Now, Pay Later” (BNPL) area of fintech that Morgan Stanley has argued is poised to continue capturing market share in the consumer spending space, especially among Millennials and Gen Z.2

Despite its downtrend, PYPL doesn’t appear to have fallen by the wayside in terms of market interest. More than 25 million shares changed hands yesterday, and its options were among the most actively traded:

Chart 3:  LiveAction scan: Largest number of options trades. Liquid options.

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


With the perennial caveat that it’s impossible to pick tops and bottoms, in the absence of a one-way stock market, more traders and investors may take a closer look at “unloved” corners of the market, rather than chasing bid-up names whose momentum could be fleeting. (Yesterday’s downside reversal showed how quickly any trend can evaporate.) Potentially discounted stocks in sectors with possible fundamental tailwinds may be one of those corners.

Market Mover Update: Unilever (UL), which fell more than 1.8% Thursday after releasing earnings, is still up around 10% since its January 18 sell-off—and its February $45 puts are trading around one-tenth of where they closed that day (see “Trading overshoots”).

Today’s numbers include (all times ET): Consumer Sentiment (10 a.m.).

Today’s earnings include: Mr. Cooper Group (COOP), Dominion Energy (D), Under Armour (UA), Cleveland-Cliffs (CLF).

 

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1 CNBC.com. PayPal stock plunges on weak earnings guidance. 2/1/22.
2 MorganStanley.com. ‘Buy Now, Pay Later’: Banking on Global Financial Innovation. 2/8/22.

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