Two sides of the breakout

04/11/19
  • YELP implied volatility (IV) jumped more than 30% from last week
  • Stock gained more than 2% intraday yesterday
  • Shares have rallied around 6% since mid-March

As longtime traders know, the stock market often trades quietly in the runup to any type of Federal Reserve news.

That was certainly the case yesterday morning, as the Dow Jones Industrial Average (DJIA) quickly boxed itself into a 50-point range between 26,100–26,150 as traders awaited the 2 p.m. release Fed meeting minutes.

So, it seems like it also should have been a snooze fest for crowd-sourcing review platform Yelp (YELP), which, despite its name, had barely been making a peep for the better part of a month, trading in a range roughly between $34.75 and $36.10.

Nonetheless, yesterday morning the stock appeared toward the top of a LiveAction scan for large one-week increases in implied volatility (IV):

LiveAction scan: Big 1-week IV gain, 4/10/19. Unusual options implied volatility (IV). YELP implied volatility up 67%.

Source: Power E*TRADE


What does a 67% weekly IV increase mean? While historical volatility (HV) simply measures the amount of past price movement in a given market over a specified period, IV represents the level of volatility option traders expect in the future (in this case, the next 30 days). That’s why, for example, you’ll often see IV rise when a stock is approaching an earnings release: Traders are anticipating the possibility of a big price move on the announcement, which translates into higher IV—and, of course, higher options prices.

So, the implication is that options traders may have been expecting YELP stock to dial up the volume—or, rather, the volatility—from recent levels.

And that seemed to be the way of it yesterday. Although YELP shares were up only a little more than 1% in early trading, they soon increased that gain to more than 2% on the day—about 10 times the S&P 500’s (SPX) percentage gain—hitting their highest level ($36.39) in 24 trading days:

Yelp (YELP), 1/10/19–4/10/19. Yelp (YELP) price chart. +2% breakout rally

Source: Power E*TRADE


There weren’t any YELP headlines coming across the tape, and the company’s next earnings release is around a month away, so the source of yesterday’s relative strength (which diminished later in the trading session) wasn’t immediately apparent—unless you simply chalk it up to the pent-up price momentum of a stock rebounding from a downturn.

Which is possible. Since falling close to $34 on March 25, YELP had rallied more than 6% as of yesterday and had broken out above its April 3 high. And although the February–March downturn came just two days after YELP’s last quarterly release, its earnings and revenue numbers exceeded expectations.1

The report also showed a 12% year-over-year advertising revenue growth and a 17% increase in paying advertiser accounts—important details given advertising comprises 96% of Yelp’s revenues.2  Many Yelp bulls will point to those numbers in making a case that yesterday’s move could represent the beginning of an accelerating uptrend.

If you can enter an uptrend on a pullback, you give yourself an edge.

But that doesn’t mean those traders should overlook a shorter-term pattern: the stock’s tendency to pull back a bit after big moves like we saw yesterday. Since April 2012, YELP has jumped 2% or more in a day while also making a 20-day or longer new high 139 times. The next two days had negative average returns, and both days closed lower more than 50% of the time. In some cases, the weakness persisted for a couple more days.3   

That type of behavior isn’t out of the ordinary, and it doesn’t have any bearing on the stock’s longer-term possibilities. But it’s a good reminder that, even if you’re sure a market is in an uptrend, you’ll often have an advantage if you buy it on a dip rather than on a big jump.

Market Mover Update: Lyft (LYFT) fell more than 7.5% intraday yesterday to a new post-IPO low of $62.25. Another recent IPO, Levi’s (LEVI), went in the opposite direction, rallying more than 5% in the wake of its first earnings report.

June gold futures (GCM9) notched their fifth-straight up day, pushing above $1,310/ounce.

Today’s numbers (all times ET): Producer Price Index PPI (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.), Jerome Powell at Democratic Caucus retreat.

Today’s earnings include: Commerce Bancshares (CBSH), Fastenal (FAST).

 

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1 StreetInsider.com. Yelp (YELP) Earnings. 4/10/19.

2 Zacks.com. Yelp (YELP) Down 9.3% Since Last Earnings Report: Can It Rebound? 3/15/19.

3 Supporting document available upon request.

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