June 2 Closing Thoughts and watchlist

Global markets surged again today, with broad gains out of Europe and U.S. markets. In Europe, the Stoxx 600 hit a multi-month high as Germany and Italy show even more signs of economic reopening.

Economic recovery hopes remain high on these shores despite ongoing protests and some rioting across American cities. New York and Minneapolis extended their curfews as rioters caused widespread destruction overnight, and the president may invoke the Insurrection Act, allowing him to use federal troops to safeguard constitutionally protected civil rights.

There is volatility everywhere but the stock market, which continues to churn higher. The S&P 500 is up 40% from its late March lows, and nearly all sectors are firing. Financial, industrial, and manufacturing stocks continue to move higher, taking the baton from technology and healthcare, which have dominated returns.

All of this is happening in the face of historically bad economic news and projections, and as anxiety creeps higher among investors. This is challenging the natural state of our animal spirits in ways we’ve never dreamed of.

Stock investors are unmoved by the GDP plunge forecast, or just about anything else that would derail this rally under normal circumstances. We’ve shown you a lot of data points to support that, and CNN’s Fear & Greed Index, which tracks money flows, options activity, stocks above their 52-week highs, and other metrics, shows that greed is driving the market, in a sharp shift from a month and year ago.

Since the Fear & Greed Index tracks overall market sentiment through money flows and technical indicators, it is capturing mostly institutional investor sentiment, since the big money moves markets.

On the individual level, our Anxiety Index, which tracks increased search interest around fear-based terms, is at record highs.

Tuesday, June 02, 2020 1. VIX drops to new lows as markets march higher 2. Option volume decline signals buy-write opportunity 3. The consumer stock worth watching now

Market Moves The CBOE Volatility Index (VIX) closed at its lowest reading since the pandemic broke. Naturally the inversely correlated S&P 500 (SPX) closed higher again (see chart below). The dynamic at play here has been repeated many times in the past two months. The decline in both historical and implied volatility leads to higher prices which spurs a virtuous cycle throughout a given week. This cycle follows a simple pattern that goes somewhat like this: (1) good news appears, (2)investors buy stocks, (3) stocks don’t crash to new lows, (4) investors stop buying put option protection, (5) option prices fall, (6) investors feel confident and interpret more (or all) news as good. The cycle then repeats as prices steadily rise. This cycle seems to be in operation now, even though one might conclude, based on headlines, that investing right now could be a frightful thing. Chart
watchers have ample evidence that, currently, investors are looking past the fear and seeing the opportunity.

Option Volume Decline Signals Buy-Write Opportunity Speaking of declining option volume, take a look at the chart below. This chart features a comparison of the CBOE S&P 500 Buy-Write index (BXY) with a chart measuring the 50-day moving average of the total volume of index options traded on the S&P 500 index (OVSPX). The importance of this chart is the reality that option trading volume has fallen back to the level where the year began, implying that option buyers expect the S&P 500 index to continue its upward trend until it makes new highs for the year 2020. A comparison between the two price trends below shows that option volume patterns similar to the current pattern are typically good for investors who like covered call strategies.

The shares of online pet store Chewy Inc (NYSE:CHWY) is seeing a surge in call volume today, with 48,000 contracts traded compared to just 6,000 puts. Most popular is the weekly 6/5 50-strike call, where new positions are being opened. Second is the 45-strike call in the same session, which also happens to be the sixth most popular open interest position. Worth noting, however, is that short interest has skyrocketed 100.8% in the most recent reporting period. These 16.71 million shares sold short now account for 34.5% of the stock’s available float, or a little over four days’ worth of pent-up buying power at CHWY’s average pace of trading. This means that some of this call volume could be shorts hedging against the potential of a further upswing. Following an especially strong rally for the stock after sales quintupled from 2016 through 2019, the equity now marks a 72% gain over the past three months. CHWY is continuing its rally on the charts today, up 6.8% at $48.19 at last check, earlier hitting a fresh record high of $48.90.