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Chart Advisor: Watching the Fed


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Monday 27th September, 2021

1/ Indexes significantly differ at close 

2/ Investors like the idea of a cruise 

3Traders optimistic on booking companies 

4/ The bottom line

1/ Indexes Significantly Differ at Close

Major indexes posted mixed results today, as investors prepared for a busy week to close out what has been a volatile month. State Street’s S&P 500 Index ETF (SPY) and Invesco’s Nasdaq 100 ETF (QQQ) tracked marginally lower, while the Dow Jones Industrial Average (DIA) and Russell 2000 ETF (IWM) moved higher, with IWM rising nearly 2%.  

In a relatively low-volume day, investors appeared to be bracing for the Fed’s inevitable steps to combat inflation, as U.S. Treasury yields rose, and the technology sector pushed lower. Rising interest rates can make tech stocks less attractive as debt becomes more expensive to hold.

Fed Chairman Jerome Powell is slated to testify before Congress tomorrow regarding the ongoing economic recovery. Eyes may remain focused on Washington D.C., as lawmakers are facing a swift deadline to prevent a government shutdown and a possible default on U.S. debt. 

SPY and QQQ, as the only indexes to move lower, may be flashing signs of a larger downward move. The chart below compares the two indexes, which have gained 20% and 19% year-to-date, respectively. The lines on the chart highlight a head and shoulders pattern for each index, which could be signaling that the long-term upward trend is nearing its end.  

2/ Investors Like the Idea of a Cruise 

Investors have bid up the share price of Carnival Corp. (CCL) after the company reported its fiscal third-quarter financial results. The company said that voyages for the third-quarter were cash flow positive, and it said there soon will be a return to full cruise operations. CCL reported that cruise bookings for the second half of 2022 were ahead of pre-pandemic levels, and they expect to have more than half of their fleet capacity open by the end of October.  

Below is a comparison of the recent performance of CCL compared to that of Booking Holdings Inc (BKNG). The travel industry was hit hard by the COVID-19 pandemic, and a resurgence in travel could be seen as a sign of a strong economy and perhaps a long-anticipated return to normalcy. CCL has gained 74% in the past year as the company rebounded from pandemic-era lows, while BKNG has gained 46% in the same span.  

Despite the disparity in annual performance, CCL has recently been outperformed by BKNG. Carnival appears to be positioned to continue to climb, but has quite a long way to go to even approach pre-pandemic levels.  

3/ Traders Optimistic on Booking Companies 

Unlike the price action on CCL, shares of Expedia (EXPE) have soared past pre-COVID price levels. Investors have bid up EXPE share prices to higher-than-usual levels as illustrated on the chart below. Call option pricing is at one of the highest points over the past 52 weeks, well ahead of current put option pricing.  

The open interest on puts and calls skews heavily toward calls, with over 257,000 calls compared to over 107,000 puts. Today’s trading volumes featured 75% calls, demonstrating the bias that option traders had. Even though EXPE stock has gained nearly 30% in the past year, option traders appear to be making bets that the share price will move higher in the future.  

For Oct. 15, the next monthly option expiration date, the largest open interest is on the $150 call, which is already deep in-the-money.  

4/ The Bottom Line 

Stock indexes showed variation in the way they closed. The Nasdaq 100 closed lower, but the Russell 2000 closed strongly higher. Investors and traders appear to be interested in travel companies right now.

Originally posted on 27rd September, 2021

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