Exchange Trade Switch (CBOE)

We’ve been monitoring at the chart of the Chicago Board Options Exchange (CBOE) for a while now and it appears there’s a nice short situation developing.

At one time, we loved CBOE stock. But that was well over a year ago when she was trading in the mid-$20s and we believed she’d make a great takeover candidate.

She still may.

But since then, others have also hopped on board, perhaps for the same reason, and drove the shares northward to nearly $60 before taking a breather.

CBOE has since drifted sideways to lower and is exhibiting signs of a nine-month head and shoulders top formation.

Have a look here –

cboe

The daily chart shows a stock that ran up strongly through mid-March and has been struggling ever since. Even the latest highs on the major market indexes did nothing for the options powerhouse, whose shares have been steadily losing ground for four-months.

The question is whether we are, indeed, seeing a head and shoulders top here (in red, at top), whose downside count would bring the exchange’s shares to either $39 or $35, depending on where you draw the neckline. Or whether support at the long term moving average (in yellow) will ultimately hold, and we’ll see a bounce that sends the stock probing for new highs.

Hmm…

From the daily chart, it’s not clear.

What is clear is that we have a move that’s been losing momentum for at least a year. RSI and MACD indicators have been diverging sharply from price over that period and the die will ultimately be cast as price approaches the long term (411-day) moving average (noted in black). If downside momentum picks up at that hour, we likely have a head and shoulders top on our hands. If it slows, we could see a bounce.

Before we get some clarity from the weekly chart, we should point out that the stock carries a not insignificant yield of 1.52%. But with her P/E ratio at a bloated 22.88, one has to wonder if anybody’s gonna buy this thing for the dividend. In our view, the only thing that will bring investors on board at this stage is a significant revving of the market engine that brings both banks and brokers – and the public – back into the investment arena en masse and forces trading volumes through the roof.

Under such a scenario the CBOE would also profit, thereby lifting the stock.

In the meantime, it doesn’t look like that’s going to happen. And the weekly chart speaks to even more potential downside.

Have a look here –

cboe2

Technically, the weekly chart shows another potential 20% decline before we strike support at the 137 week moving average in the vicinity of $39/$40. There’s no obvious support before that level.

In addition, we also have a longer term bearish indication from the RSI and MACD indicators, the former of which dove below its all-important waterline back in April, putting us on alert that a potentially longer term bearish move was in the making. Last week MACD submerged as well, confirming RSI’s move and labeling this one a goner (red circle at bottom).

At least for the time being.

It would take an immediate reversal higher at this stage – strong enough to pry the weekly MACD back above her waterline – to convince us that lower prices weren’t inevitable over the intermediate term.

cook

Sorry to say it, Mr. Chicago Board man, but it looks like you got way ahead of yourself over the last year and have to cool off for a while.

We’re going to recommend negative action on your stock from this point onward, though it’s not without some head scratching that we do so.

HEAD SCRATCHING? WHAT? LICE?

What’s interesting about the CBOE is that as a securities exchange it should be representative of the state of the markets as a whole. If it’s producing profits and rising accordingly, the bull’s in good shape. If not, we have a problem.

A look at the options on CBOE stock itself is not particularly revelatory. There’s no skew to speak of on the six month options contracts – the betting is even money, 1:1, that we have a drop or a rise by December expiry.

As to the other exchanges, the Intercontinental Exchange (NYSE:ICE), owner of the NYSE, and the Chicago Mercantile Exchange (NASDAQ:CME), owner of the NYMEX, both have charts that resemble the CBOE.

By contrast, shares of the London Stock Exchange (LON:LSE) and the NASDAQ OMX Group (NASDAQ:NDAQ) are near all time highs and look very strong.

So we’re not looking at an industry-wide phenomenon here.

More like: sometimes you got it, sometimes you don’t.

A speculative CBOE PUT that expires at year’s end could be very profitable.

Many happy returns,

Matt McAbby, Senior Analyst, Normandy  Research

See what people are saying...

  1. Philip Henry

    It used to be that brokerage stocks anticipated major moves in the equities markets. If CBOE falls dramatically, maybe it’s a precursor of the market in general.

  2. Larry

    So we don’t discuss our timely failures? No glowing semantics about your month long, if not year long, plot
    to profit from GLD’s slide fetching juicy profits on the puts? Realities kept throwing this back into your face but you continued to plead us to buy more GLD puts! I believed you way too long and can’t help but feel disappointed…..if not disillusioned…..by you refusing to see the numerous upheavals occurring around the world which kept the public fear factor alive and feeling insecure…..and buying more gold.
    When you’re wrong and it’s thrown in your face time and again……spare us and at least offer caution as to your irrational tenacity.

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