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My indicators are giving bullish readings this week, but because of something I noticed on the CBOE S&P 500 Volatility Index (VIX), I am recommending a bearish put on Tufin Software Technologies Ltd. (NYSE:TUFN) as protection against a pullback.
The market continues to push higher. The S&P 500 crossed and closed above the 3,300 level for the first time ever yesterday, ending at 3,316.81.
Not to be left out, the Dow Jones closed above the 29,000 level for the first time on Wednesday, and it tacked on another 270 points yesterday to close at 29,297.64. It’s now just over 3% away from the 30,000 mark.
Even the small-caps are getting in on the action. The Russell 2000 has been on a tear over the past week, and it closed above the 1,700 level for the first time since late September of 2018 yesterday. It is now just about 2% away from hitting a new all-time high.
But in the chart of the VIX below, you can see that the S&P 500’s “fear gauge” has been making higher lows since late November of 2019.
Daily Chart of the CBOE S&P 500 Volatility Index (VIX) — Chart Source: TradingView
The higher lows on the VIX are not very dramatic, but because the VIX and the S&P 500 typically have an inverse relationship, we would expect that higher highs for the S&P 500 would mean lower lows on the VIX.
Whether this is significant is hard to tell at this point, but a cautious put position on TUFN is a good way to protect your portfolio against potential bearishness.
TUFN’s Poor Guidance and Investigations
TUFN is an Israeli security software company. Though you would expect the recent instability in the region to have hit its prices, the company didn’t drop after the attack on Iran.
Instead, the stock started struggling when it announced preliminary results for its upcoming earnings report on Feb. 13. The company didn’t do well in the fourth quarter, and it slashed revenue guidance as a result.
The stock suffered a significant drop after the announcement, and shortly after, several shareholder rights law firms, announced they were investigating the company’s executive officers for violations of federal securities laws.
The firms include Robins LLP, Bronstein, Gewirtz & Grossman, LLC, Pomerantz LLP, Berman Tabacco, and Bernstein Liebhard.
TUFN may have bounced back from its guidance cut, but these investigations are bound to keep its price down.
Why Would Investors Want to Push TUFN Above Resistance?
If you look at the chart below, you can see that TUFN bounced off the $12 level on the day it slashed its guidance for the fourth quarter. The stock did start to push higher, but it’s running into resistance at the $15 level.
Daily Chart of Tufin Software Technologies Ltd. (TUFN) — Chart Source: TradingView
The real question at this point is, why would investors want to push the stock higher at this point?
It would take a lot of optimism to push the stock above resistance. Investors are pushing into technology stocks, and while they may be looking for deals, TUFN has more fundamental issues — a loss for the fourth quarter and five law firms investigating it — than other companies.
There is a good chance that the stock will get rejected at the $15 level and start to head lower. If it does, it could head all the way back down to $12, making the $12.50 strike price an excellent target for a long put.
Buy to open the Tufin Software Technologies Ltd. (TUFN) April 17th $12.50 Puts (TUFN200417P00012500) at $0.85 or lower.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.