Following the worst single-day performance of the year for US stocks on Tuesday, which featured intense volatility and repeated swings between gains and losses, the market is now attempting to stabilize. Wednesday brings a dual test for investors: the morning's CPI inflation data release and the after-market earnings report from software giant Oracle (ORCL).
Reasons for Market Optimism
Despite the recent turmoil, there are grounds for optimism. Options market activity shows a bullish trend for stocks that benefit from falling interest rates. Additionally, a significant number of call option buyers are betting that Oracle's stock could experience its largest single-day move since the COVID-19 pandemic.
Strength in Rate-Sensitive Sectors
Even though economists widely forecast that annualized CPI data will exceed 4% for the first time in three years, rate-sensitive sectors led the market higher on Tuesday. US Treasury prices strengthened, while regional bank and homebuilder stocks rallied, with small-cap stocks closing the day in positive territory.
Options trading for homebuilder ETFs XHB and ITB was almost exclusively in call options. For ITB, traders bought 3,200 call contracts versus only 68 put contracts. The call-to-put volume ratio for XHB was nearly 10-to-1. For the regional bank ETF KRE, call option volume was more than triple that of puts.
A key factor supporting improved interest rate expectations was the drop in oil prices below $86 per barrel on Tuesday, hitting its lowest level since mid-April.
Ben Emons, founder and chief investment officer of Fed Watch Advisors, noted in a phone interview, "The decline in oil prices suggests tomorrow's CPI data could potentially come in lower than expected. The oil price movement indicates the market has, to some extent, priced in Trump's verbal pressure, regardless of whether the market agrees with it or not."
Although there were renewed tough statements from Trump regarding Iran early Wednesday, oil prices saw only a modest increase, indicating a muted market reaction.
Focus on Oracle's Earnings
Whether market capital will rotate from mega-cap tech stocks to other sectors depends significantly on Oracle's after-market earnings performance. The software giant, with a market cap nearing $600 billion, is the largest holding in the IGV ETF, and its sector has outperformed the second-place sector by 15 percentage points year-to-date.
The options market is pricing in an expected post-earnings stock price move of around 12% for Oracle. This represents the highest level of implied volatility ahead of an Oracle earnings report since March 2020.
However, the persistent bullish tilt in Oracle's options flow over the past week has somewhat alleviated market concerns.
On Tuesday, Oracle call option volume was double that of put options: traders bought over 27,000 call contracts compared to fewer than 19,000 puts. According to data from options analytics firm SpotGamma, total option premium volume for the day reached $300 million, with approximately $220 million stemming from call options.
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