Unwanted corporate confessionals prompts autumnal volatility seekers of the bearish ilk to emerge from hibernation in Tuesday’s session. For its part the S&P 500 ETF (NYSEARCA:SPY) slumped 1.26% within a “still” tight lateral trading range—but one looking more worthy of bearish historical tendencies starting to rhyme.
Tuesday’s blame game for why the market did what it did was largely pinned on industrial aluminum giant and Dow Jones component Alcoa Inc (NYSE:AA). Shares of AA slid nearly 11.50% after the company reported a two-cent profit miss and failed to meet revenue expectations.
Alcoa’s ceremonial earnings lead for the third-quarter reporting period has some investors concerned it could be a warning shot over the bow for earnings in the S&P 500 Index.
There’s a lot riding on this quarter’s net results as the market is expensive by historical measures, just off all-time-highs and perversely enough, in the midst of a multi-quarter, earnings recession.
Tuesday’s Other Market Drivers
Biotech sequential array testing giant Illumina, Inc. (NASDAQ:ILMN) didn’t help dissuade investors from selling on Tuesday. Shares of ILMN were sent spiraling lower by 25% after the company slashed guidance for its third quarter below Street views and offered flat to marginal growth for Q4.
Coupled with polls now decisively favoring Clinton in the U.S. Presidential election next month and that campaign’s crosshairs aimed at abusive healthcare price practices, a “risk-off” theme gaining traction in the iShares NASDAQ Biotechnology Index ETF (NYSEARCA:IBB) could prove costly to both sector and market bulls.
Emerging markets which have significantly outperformed U.S. market barometers in 2016, certainly didn’t help bulls’ animal spirits either. Relative weakness appears to have taken a cue from Alcoa’s report as investors reassess market risk for commodity-producing countries.
For its part, the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) finished off more than 2.30%, while the iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) fell nearly 3%.
Lastly, the energy complex took a breather Tuesday as well. Following November crude’s push to a one-year high just yesterday, the contract gave back about 1.10% to finish at $50.79.
A bearish report citing record OPEC production in September helped support profit-taking following a rally of about 15% over the past couple weeks…or of course, you could blame Tuesday’s pressure on Alcoa.
Unusual Movers: Options
One of Tuesday’s big movers was the CBOE Volatility Index or VIX. The notorious fear (and complacency) barometer spiked nearly 15% as investors jumped into the options market to buy portfolio insurance and in the process, driving up premiums across-the-board.
The VIX finished at 15.4% and backed off its session high of 16.5% which resulted in a test of the 200-day simple moving average. Tuesday’s extreme did put the fear gauge more than 15% above its 10-day simple moving average.
Short term, the bid in the VIX does hint of a potential overreaction. Having said that, with most historical panics coinciding with readings in excess of 25% to 30%, we’ll remind investors we’re only in the first half of October.
Coca-Cola
It’s not very often The Coca-Cola Co (NYSE:KO) comes across the radar of options traders, but that wasn’t the case on Tuesday.
One or more KO traders put together enough volume in the out-of-the-money December $40 put to make the contract one of the more active for S&P 500 constituents.
Trading of more than 20,000 puts compares to open interest of less than 10,000 and suggests either portfolio insurance or an outright bearish wager was initiated by Tuesday’s buyers.
The put-to-call ratio in KO came in at a hefty 3.92 and overall put volume swelled to 45,000. News of Coca-Cola purchasing a competitor’s stake in an overseas bottling concern may have prompted the activity.
Then again, maybe the KO options activity simply reflects a bearish price chart suggesting “Coke is not it” with investors in 2016?
As of this writing, investment accounts under Christopher Tyler’s management do not maintain positions in any of the securities or their derivatives mentioned. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
