U.S. stock futures are trading higher this morning continuing Tuesday’s relief rally. In early morning trading, the futures on the Dow Jones Industrial Average are up 0.39% and S&P 500 futures are higher by 0.31%. Nasdaq-100 futures have added 0.48%.
In the options pits, call buyers were busy yesterday. Helping to drive this week’s push upwards was the headline that U.S. politicians may have come to terms on a budget deal, increasing the likelihood that we won’t have another government shutdown over it. Wall Street likes that and the buyers stepped in in droves on Tuesday. The action was bullish. We had 17.7 million calls and 13.2 million puts during the session.
However, there is still overall caution from many skeptics of this rally. The CBOE single-session equity put/call volume ratio was 0.57. Yes this is still lower than the 10-day moving average of 0.62, so sentiment is improving.
Options activity was pretty much one sided on Tuesday. This is normal as fear levels abate. Netflix (NASDAQ:NFLX) was in the news and spiked more than 4% and the action was just as bullish in the options. Qualcomm (NASDAQ:QCOM) also showed strength and upcoming potential. Finally, Micron (NASDAQ:MU) also rallied big, up 4.7% on Tuesday — and the appetite for options suggest that there could be more to come.
Let’s take a closer look:
Yesterday, Netflix did not have unusual volume size relative to its daily average, but it made up for that in stock exuberance. NFLX rallied 4%, which was almost three times more than the markets in general. Moreover, the mix of calls to put told an even more bullish story — 61% calls and 39% puts.
The NFLX stock fundamentals are not great from the traditional sense, but that is not a reason to short it. They overspend and they carry an astronomical valuation, but what traders are chasing has nothing to do with fundamentals. Wall Street gives Netflix stock a pass on profitability for as long as they are growing their international subscriber base.
So for now, the chart looks technically frisky even after this massive move. It is now up 55% from the Christmas crash and over 30% year-to-date. Tuesday, it closed on the absolute high of the day and very close to the last fail points from February 5th.
Now the chart looks like an imminent breakout of a bullish cup and handle pattern. The potential target if it plays out would be $390 per share. Keep in mind that last October, $381 was the start of its demise, so I’d expect the bears to fight hard there.
Not too long ago, Micron was the whipping stock for the bears. It fell hard after its last earnings and the Christmas market crash cratered MU stock to $28.39 per share. Since then, the stock is up over 40% and not showing signs of exhaustion. The 4.7% rally yesterday was mirrored in the options trading, since it had 118% of daily average, where 64% were calls and 36% were puts.
The Micron stock fundamentals are solid. Even after this rally, it still sells at a trailing-12-month price-to-earnings ratio of 3. Compare that to say Advanced Micro Devices (NASDAQ:AMD) which sports a P/E of 71.
The upside potential in MU stock is palpable. If the bulls can muster up enough energy to beat the Feb. 6 high of $41.96 per share, this will trigger a momentum buying wave to target $47.50. There would be resistance along the way especially around $44. Conversely, losing $37.20 would foil the notion of this breakout being imminent.
Yesterday, QCOM stock fired off a trigger alert on many screens as it poked above $52 per share. But the spike was very brief and it marked the high for the day. The stock slid to close at $51.66. Nevertheless I reset my trigger to chase if Qualcomm can rise higher. Then this would trigger the buy signal and this time to target $54 then $56 per share. First it needs to fill the gap from late January. There it will face resistance. Then it could extend the rally up to $56 where the real resistance starts.
This, of course, will require the help of the general markets. Otherwise QCOM stock could recoil here to $50.50 before finding short-term footing. Politicians are still in control of the headlines so the fundamentals don’t matter much meanwhile. QCOM is not cheap since it sells at 33x price-to-earnings ratio. So if the markets correct it could be vulnerable to the bears.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.