Trade idea: If CME bulls don’t want to rely entirely on the proven mettle of the 160-day moving average, it’s an opportune time to buy protective puts at decent prices, even with earnings soon, says Elizabeth Harrow, at Schaeffer’s Investment Research.
Exchange operator CME Group (CME) doesn’t exactly have a cult following. Right now, the StockTwits rolling 7-day message volume for CME is 17, compared to totals of 3,347 for Apple (AAPL) and 1,695 for Valeant Pharmaceuticals (VRX).
But for those who are paying attention, CME has delivered some outsized returns. The stock is up about 21% year-over-year, and it's more than doubled since mid-2013. And CME is currently bouncing from a trendline with a proven track record of serving as the springboard for healthy gains.
Specifically, CME stock is fresh off a successful test of its 160-day moving average. Looking back, Schaeffer’s Senior Quantitative Analyst Rocky White found that on CME’s seven prior tests of this trendline, the stock was up an average of 1.17% five days later (with 71% of those returns positive). Going out 21 trading days from a meet-up with its 160-day moving average, CME was 4.9% higher, on average -- again, with 71% positive returns.
With the stock touching down at its 160-day as recently as July 19, we're still in the very early innings of another potentially bullish technical pattern playing out. Against this backdrop, a continuation of the recent short-covering trend could help CME’s case.
Short interest fell 11.5% in the most recent reporting period to 5.02 million shares–down almost 37% from the mid-March peak of 7.91 million shares. But the current accumulation is still 37% above the 2016 calendar year low, which suggests there may be some additional unwinding yet to come before we’ve seen a full-on capitulation by CME shorts.
It’s earnings season, though, so it’s worth noting that the exchange operator’s upcoming second-quarter report, which is due out before the opening bell rings next Tuesday, Aug. 1. Historical earnings reaction data from Trade-Alert shows an even split of positive and negative returns over the last eight quarters, with an average daily move of 1.8%.
CME’s biggest negative earnings reaction over the past two years occurred as recently as April 27, when the stock fell 4.1%. Interestingly, the day before those results were announced, CME closed 5.66% above its 160-day moving average. By contrast, as of this writing, the stock is trading less than 2% above this historically bullish trendline–meaning a key layer of technical support is close at hand as the company's quarterly report approaches.
But if CME bulls don’t want to rely entirely on the proven mettle of the 160-day, it’s an opportune time to buy protective puts at decent prices, even with earnings right around the corner. At-the-money implied volatility stands at 20.52% in the 8/4 weekly expiration options series–not too far north of 17.03% for the 7/28 series, and 18.55% for the 8/11 options.
