Apple Volatility Highlights Wary Tech Trading Before Earnings

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Uneasiness over a surging dollar has options traders protecting against losses in technology companies from Apple Inc. to Microsoft Corp. ahead of earnings announcements this week.

Demand for options that protect against future losses in shares of an exchange-traded fund tracking companies in the technology-heavy Nasdaq 100 Index rose to the highest level in more than two years relative to bullish ones, according to data compiled by Bloomberg. Anxiety over Apple shares is at the highest in seven quarters before its earnings on Tuesday.

The Standard & Poor’s 500 Index swung by more than 1 percent on an intraday basis for 15 trading sessions through Thursday, highlighting the market’s volatility coming into one of the busiest weeks of earnings season. Options speculators are now bracing for the impact the strongest dollar in more than a decade will have on the profitability of multinational technology companies that rely heavily on exports.

"A stronger dollar is one of the main threats on the tech sector," Pierre Mouton, who helps oversee $8 billion at Notz, Stucki & Cie. in Geneva, said in a Jan. 23 phone interview. "There is quite a substantial amount of exposure for companies, and earnings could be affected in the short-term."

Dollar Strength

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 1.9 percent last week, closing at the highest since the index started in 2004. The greenback reached the highest since 2003 against the euro on Friday after the European Central Bank unveiled an extended stimulus plan in an effort to combat the threat of deflation.

The dollar measure was little changed at 4 p.m. in New York, while the S&P 500 rose 0.3 percent to 2,057.09.

The rising greenback hurts export-oriented technology companies as it reduces the value of foreign-currency earnings when they are repatriated back to the U.S. Apple, Microsoft and Google Inc., which have the biggest weightings on the Nasdaq 100, generate half or more of their revenue from markets outside the U.S., data compiled by Bloomberg show.

Leading up to Apple’s Jan. 27 earnings announcement, a gauge tracking the 30-day expected volatility in the shares rose to 38.01 last week. That was the highest level one week prior to an earnings report since April 2013.

Earnings Forecasts

Analysts have been cutting their profit estimates for the broader technology sector over the past several months. Earnings for the group are forecast to have grown 9 percent in the final three months of 2014 and increase 9.2 percent for the current quarter, down from analysts’ estimates of 10.3 percent and 12.5 percent, respectively, in September.

There’s a "heightened awareness of uncertainty around consensus earnings right now," Kevin Divney, chief investment officer at Beaconcrest Capital Management LLC, said in a Jan. 21 phone interview.

On multiple occasions over the past year, investors have looked to sell technology shares, many of which are the biggest winners of the six-year bull market, on the first signs of market turmoil.

Past Volatility

In April, amid concern valuations had become overextended, the Nasdaq 100 fell the most in two years as investors shifted money out of Internet and biotechnology stocks and favored companies with stable dividends and earnings. The index also sold off 8.2 percent over a one-month period starting in September amid growing concern of an international economic slowdown.

More recently, investors have dealt with uncertainty over when the Federal Reserve will announce an interest-rate increase. Global equities have also been roiled by a more than 50 percent plunge in crude oil that has sent prices of the resource to the lowest in almost six years.

"To the extent investors think we’re going to have a selloff in the market, that would be an obvious place to book some gains," Walter Todd, who oversees just over $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates LLC, said in a Jan. 21 phone interview. "They might also be simply hedging against a loss."

Oil Boost

The decline in oil may actually be a boon for technology stocks in the coming quarters, according to Dubravko Lakos-Bujas of JPMorgan Chase & Co. Earnings growth for technology companies becomes negatively correlated with crude oil prices over time, according to JPMorgan and Bloomberg data.

Technology stocks, along with discretionary and financial companies, are "historically the largest beneficiaries of lower oil prices," Lakos-Bujas, the New York-based head of U.S. equity and quantitative strategy at JPMorgan, wrote in a Jan. 22 note to clients. "The full impact is not immediate, but rather lagged over two quarters," he said.

Options protecting against a 10 percent drop in the Powershares QQQ Trust Series 1 cost 10.2 points more than calls betting on a 10 percent rise on Jan. 14, according to three-month data compiled by Bloomberg. That was the highest since June 2012 and above the 8.4 point average for the price relationship known as skew since the start of 2010.

Microsoft, Yahoo

Some investors have been backing away from the ETF, with shares outstanding on the fund declining 15 percent since the start of December.

Earnings reports this week from technology companies tracked by the QQQ ETF will provide a clearer signal about prospects for investors in the Nasdaq 100.

Microsoft is forecast by analysts to report fiscal second-quarter earnings per share of 75 cents, which would be down 4 percent from the same period the previous year. Microsoft jumped 24 percent in 2014.

Yahoo! Inc., which climbed 25 percent last year, is expected to report quarterly profit per share of 29 cents, down 37 percent from a year prior. Revenue will also fall 1 percent on a year-over-year basis, analysts predict. Inc. and Qualcomm Inc. will also report a decline in quarterly profit from the previous year, according to analyst estimates.

"There’s some question about business confidence and business spending on tech, which would give investors caution," Chris Gaffney, the senior market strategist at St. Louis-based EverBank Wealth Management, said in a Jan. 21 phone interview. "Global growth seems to be slower than previously thought, which also puts some pressure on tech stocks."