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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, May 26, 2020

1. Big tech investors take profits at resistance

2. A rising tide for cruise lines

3. Just how safe (or dangerous) is this water?

Market Moves

Though stocks gapped up at the opening of trading today, investors seemed to be taking profits as the indexes lost ground throughout the session. By the end, the Nasdaq 100 (NDX) closed slightly lower, while the S&P 500 index (SPX) still managed to close 1.23% higher. This suggests that institutional investors may be migrating away from previously aggressive investments in growth companies, and seeking out a greater number of value-priced stocks as they anticipate the re-opening of the U.S. economy.

In the chart below Invesco's Nasdaq 100 ETF (QQQ) shows that it has fully ascended back to the level before the pandemic crisis hit, but now that it has, it seems that investors are repeatedly selling shares more often than buying at these levels. This phenomenon is known among technical analysts as overhead resistance and it usually occurs when large numbers of investors want to sell at a given price level over a period of time. This occurs when investors have been holding onto the investment for awhile, in this case, likely before the COVID-19 outbreak forced everyone into relative seclusion.

But investors do not seem to have lost their appetite for investing, but rather they seem to be shifting focus to over sold companies. This value-seeking behavior may create some excellent opportunities for shrewd chart watchers.

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A Rising Tide for Cruise Lines

Among those stocks that most investors, retail and institutional alike, are treating as though they were value priced, are cruise line companies. Specifically, Royal Caribbean Cruise Lines (RCL), Norwegian Cruise Lines Holdings (NCLH), and Carnival Cruise Lines (CCL). The chart below compares these companies to State Streets' Consumer Discretionary index ETF (XLY). It is not hard to discern the difference in relative strength between these companies and this ETF. Shares of XLY have rapidly risen since recent market lows, while cruise stocks were barely staying afloat after having sunk as much as 80 percent so far this year.

Today however, all three stocks jumped in price by about 12 to 15 percent. Investors looking ahead to a point in time when these companies will again be open for business are speculating that prices will return to their pre-pandemic highs after news over the weekend included encouraging news regarding the reopening of many stores and businesses across the U.S.

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Just How Safe (or Dangerous) is the Water?

These stocks likely represent the most beleaguered industry group in recent weeks. As such risk-tolerant investors have sought them out and are planning to take a buy-and-hold approach. Those investors that plan to ride the up and down waves of this industry recovery, should be aware that there is a source of information available to them that gauges the risk of bankruptcy for these companies: namely, option sellers.

The chart below compares the implied volatility of various options on the three major cruise lines. Just over the weekend, these prices have made a significant improvement and now only two of the three companies (CCL and NCHL) still have options with implied volatility scores that calculate a move greater than the current price of the stock.

Such prices are what happens when options sellers expect that there may be a chance of a company going bankrupt in the months ahead. For now the only options with measures that high are those with expiration dates around the January 2021 timeframe. Such pricing literally interprets as "if this company is going to go bankrupt, it will likely do so before the end of the year." Given that all three of these companies have enough cash on hand to last to that point and beyond, it seems a reasonable bet that they won't go bankrupt this year.

The Bottom Line

Stocks are showing a pattern of resistance among big tech companies, and strong support among value-priced companies. Many people consider cruise line companies to be value priced nowadays and that may explain why they jumped higher today. Investors buying into these companies should look closely at option prices to determine the probability that any of these companies could go under before fully recovering.