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Chart Advisor: The Slide Resumes

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Tuesday, 14th September, 2021

1/ Indexes slid lower even after CPI report 

2/ Are global investors nervous?

3Review this AZO option trading strategy setup

4/ The bottom line

1/ Indexes Slid Lower Even After CPI Report

Stock market indexes slid lower from the open, pushing prices below last week’s lows by sessions end. The market reacted negatively to the Consumer Price Index-Urban (CPI-U) report released earlier today by the U.S. Bureau of Labor and Statistics (BLS). The report was similar to last month’s level of 5.4% annualized, signaling that inflation hasn’t really slowed. 

The chart below displays how the ETFs of the four major indexes have experienced the first multi-day slide in several months. State Street’s S&P 500 Index (SPY), Invesco’s Nasdaq 100 (QQQ), iShares Russell 2000 (IWM) and State Street’s Dow Jones Industrial Average (DIA) ETFs all traded to their lowest price in at least a week. This may indicate that investors are feeling nervous about how the economy will perform in the months ahead because inflation is still evident. 

2/ Are Global Investors Nervous? 

The Australian Dollar/Japanese Yen (AUDJPY) has historically been closely correlated with the Nasdaq 100 (NDX). Over the past year this correlation faltered a bit, but now seems to be on the mend. That is unfortunate for NDX because it may mean that the forex pair will lead those stocks lower.  

Experienced chart watchers know that the AUDJPY pair makes a good proxy for global attitude toward growth investment. With the AUDJPY appearing to be positioned to track lower, it could be forecasting a similar downturn for the NDX. Because markets are experiencing a more than one week-long downward trend, the AUDJPY price action could be a signal that investors see a continuation of the downtrend instead of a reversal.  

3/ Review This AZO Option Trading Strategy Setup 

AutoZone (AZO) will release its fiscal fourth-quarter earnings announcement Sept. 21, before the market opens. Analysts are forecasting earnings per share (EPS) of $29.69 to go along with $4.54 billion in revenue. AZO has beat analysts’ EPS expectations in 11 of the last 12 quarters. AZO has historically offered the opportunity for a winning bull put spread option trade ahead of earnings.  

A bull put spread is an option strategy that involves simultaneously buying and selling two put options with the same expiration date, but different strike prices. Over the last 12 quarters, this strategy has had a 75%-win rate, with an average return of more than 17%. The strategy calls for selling a 75-delta put and buying a 15-delta put. As per the image below, these statistics apply to bull put spreads opened one week before earnings and closed one week after the report is released.  

Option pricing increases ahead of earnings in anticipation of drastic moves in either direction. As a credit spread, this strategy can profit from the typical drop in implied volatility that occurs after an earnings report is announced. This trade example is a strategy that appears to be insulated from that phenomenon.  

4/ The Bottom Line 

Stocks slid lower demonstrating that investors are worried about more than just inflation. The price action on the AUD/JPY currency pair seems to confirm this.

Originally posted on 14th September, 2021

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