Focus on the Price

By John Jagerson, CFA, CMT

Friday, January 11, 2019

1. NFLX surges higher on two analyst upgrades

2. S&P 500 holds its breath before earnings

3. Put/Call ratio back below 1

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Major Moves

Netflix (NFLX) surged higher for the ninth consecutive day today on the back of analyst upgrades from Raymond James and UBS, just one week before the company reports earnings.

Raymond James analyst Justin Patterson raised his price target for the stock to $450 – more than $100 above the stock’s close price of $337.59 – while UBS analyst Eric Sheridan boosted his target price from $400 to $410.

Analyst ratings seem to have an almost magical way of pushing stocks higher, or lower, depending on the nature of the rating.

When an analyst upgrades a stock, you can almost guarantee the stock is going to enjoy a momentary bounce. Similarly, when an analyst downgrades a stock, you can almost guarantee the stock is going to suffer a temporary setback.

As we dive deeper into earnings season, it’s going to be important to keep your eyes on the pre-market analyst upgrades/downgrades that are bound to excite the market as analysts try to get out ahead of official corporate earnings announcements.

S&P 500

The S&P 500 stalled along with virtually every other major stock index today, closing down 0.01% at 2,596.26 as Wall Street prepares for earnings season.

This is a phenomenon we see quite often before the beginning of earnings season. Traders are content to sit back and wait for new information to be released before making any new buying or selling decisions.

Next week is going to be an important earnings week for the S&P 500. The Financial sector kicks things off in earnest, but analysts are going to be watching a few other important S&P 500 components as well.

Here is a list of key announcements to watch for next week:

Monday, January 14

• Citigroup (C)

Tuesday, January 15

• Delta Air Lines (DAL)
• JPMorgan Chase (JPM)
• Wells Fargo (WFC)
• United Continental (UAL)

Wednesday, January 16

• Goldman Sachs (GS)
• U.S. Bancorp (USB)
• Alcoa (AA)

Thursday, January 17

• Morgan Stanley (MS)
• American Express (AXP)
• Netflix (NFLX)

Friday, January 18

• Schlumberger (SLB)

If these companies can meet, or beat, expectations, the stock market is likely to continue its recovery.

Read more:

Why Companies Report Earnings at Different Times

Earnings Guidance: Can It Predict the Future?
Company Earnings and EPS: Everything Investors Need To Know

Source: finviz.com

Risk Indicators

When traders get nervous about potentially dramatic bearish moves in the stock market, they tend to not only unload some of their riskier positions but also buy put options to cover the rest of their portfolio.

A put option is a trading contract that increases in value when the price of the asset the contract is based on goes down. For instance, if you buy a put contract on the SPDR S&P 500 ETF (SPY), and price of SPY drops, the value of the put contract you bought will go up.

Put options have a bullish counterpart called call options. A call option is a trading contract that increases in value when the price of the asset the contract is based on goes up. For instance, if you buy a call contract on the iShares Russell 2000 ETF (IWM), and price of IWM rises, the value of the call contract you bought will go up.

You can learn a lot about how confident, or not, traders are at any given time by comparing the total number of puts traders are buying with the total number of calls they are buying. This comparison is called the Put/Call ratio.

The Put/Call ratio is a relative-strength indicator. It rises when traders become more bearish and start buying more puts than calls. It falls when traders become more bullish and start buying fewer puts than calls.

During normal market conditions, the Put/Call ratio remains below 1 – indicating traders are buying fewer puts than calls. However, when traders get nervous and start buying more puts to protect their portfolios, the Put/Call ratio will rise above 1.

On December 20, the Put/Call ratio rocketed to its highest close level in nearly a decade: 1.49.

Since that time, the indicator has bounced back and forth but is starting to stabilize below 1 again. This is a positive sign trader fear is starting to subside.

Read more:

What's a put-call ratio and why is it important?

Measuring Stock Market Sentiment With Extreme Indicators

The Top Technical Indicators for Options Trading

Bottom line: Selective but Bullish

The U.S. stock market has been showing its resilience throughout January, but that resilience has been selective. Traders continue to reward those companies they believe are fundamentally sound while punishing those companies whose stock prices have risen above a reasonable valuation level.

We expect the same to continue during earnings season. Stocks that do well will likely see strong surges higher, while those that don't will be sold. The rising tide that used to float all boats has gone out.

Read more:

Media M&A to Watch in 2019
Profit From Earnings Surprises With Straddles And Strangles

Investing for Beginners