Trading outside the box

07/15/20
  • FDX has traded in range since crushing earnings on July 1
  • Stock posted one of its biggest daily gains in three decades
  • Numbers surprised Street on nearly every front

One way to find stocks with momentum potential is to track down the ones that have moved a lot in the past but are currently cooling their heels.

There are different ways to go about it. Some traders looking for a buying edge search out options with low implied volatility (since low IV often translates into cheaper premiums), but it’s also a way for stock traders to find potential breakout candidates, because low volatility can sometimes highlight temporarily dormant stocks that may not be dormant forever.

Yesterday, for example, FedEx (FDX)—a stock that fell to a nearly eight-year low in March—was popping up on a few LiveAction scans indicating its IV was less than its historical volatility (HV), meaning the options market was expecting the stock to move less in the near future than it has in the recent past:

Chart 1: LiveAction scan: 30-day HV > 30-day IV. Forecasted volatility less than past volatility.

Source: Power E*TRADE


A quick check also confirmed FDX’s IV was running below average for every weekly options expiration through August 21. So, all else being equal, FDX options traders may have been looking at relatively underpriced options in a situation where (relatively low IV aside) the stock was potentially setting up for a  breakout.

The key word is “relative,” since the price chart below shows why FDX’s IV was low compared to HV—the stock’s nearly 12% rally on July 1 when the company apparently caught the Street off guard by topping earnings estimates by more than 50% and posting a 20% revenue increase:1  

Chart 2: FedEx (FDX), 3/11/20–7/14/20.

Source: Power E*TRADE


Although that led to a flurry of upwardly revised analyst estimates for the stock (average $164.35; high $1882), FDX has since formed a nearly perfectly horizontal trading range a little below $160.  

Aside from gauging the broad-market environment and one-off factors that could push FDX’s stock price around (earnings aren’t due again until September, by the way), traders attempting to handicap the stock’s direction may have discovered that the July 1 rally was pretty exceptional for FDX—its second-biggest one-day gain since 1990.

In fact, the stock has had only 35 other daily gains of 7.5% or more over the past 30 years. And when you analyze what the stock has done in the 15 days (three weeks) after those big up days, you find that, on average, it’s tended to outperform to the upside. This chart compares the stock’s average 15-day return after the big up days to the average of all 15-day returns over the past 30 years:

Chart 3: FDX 15-day returns after big one-day gains, 1990–2020.

Source (DATA): Power E*TRADE


FDX gained around five times as much (3.8%) in the three weeks after one of the big up days than it did in a typical three-week period (0.8%), and it was higher 24 out of 35 times.3

A deciding factor? Of course not. A lot can happen in three weeks, even if the implied forecast turns out to be fairly accurate (bear trap, anyone?). But long-time traders understand the value of having as many pieces of the puzzle in hand before assessing what the picture is.

Earning season kickoff: In what felt a bit like a rerun of the start of last earnings season, yesterday JPMorgan Chase (JPM) crushed estimates (hauling in record trading revenues), Citigroup (C) beat its numbers, and Wells Fargo (WFC) came up way short (posting a $2.4 billion loss). Delta Air Lines (DAL) also posted disappointing results, logging its worst quarter in a decade.

Market Mover Update: Options traders appeared to be heavily vested in electric vehicle maker Workhorse (WKHS), which has consolidated for several days since pulling back around 38% from its July 2 record high. Yesterday morning WKHS topped the LiveAction scan for high open interest (OI), with the number of open options trades nearly 56 times average. Solar stocks added to their recent rally—First Solar (FSLR) jumped 10% intraday to a new year-to-date high.

Today’s numbers (all times ET): Empire State Manufacturing Survey (8:30 a.m.), Import and Export Prices (8:30 a.m.), Industrial Production (9:15 a.m.), EIA Petroleum Status Report (10:30 a.m.), Beige Book (2 p.m.).

Today’s earnings include: Alcoa (AA), U.S. Bancorp (USB), Progressive (PGR), UnitedHealth (UNH), Goldman Sachs (GS)

 

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1 StreetInsider.com. FedEx (FDX) PT Raised to $181 at UBS After Beating EPS by ~60%. 7/1/20.

2 TipRanks. FedEx Price Target & Analyst Ratings. 7/14/20.

3 Reflects 15-day changes in FedEx (FDX) closing prices, 12/31/89–7/13/20. Supporting document available on request.

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