Fear has been in short supply on Wall Street lately, but that doesn’t mean that investors are seen smooth sailing across the market.
According to a Goldman Sachs analysis of the options market, there are 15 names “where fear is elevated,” based on their recent activity in the options market, which indicates “a high degree of downside risk in the next 12 months,” as measured by their skew and expected volatility over the next year.
The names span six of the 11 primary S&P 500 sectors, though they are concentrated in two: health care and industrial, which each have five names cited by the investment bank.
“This fear setup is in stark contrast to the average stock in the market where options reflect the lowest implied volatility and skew in nearly a year, if not more,” wrote a team of analysts led by Katherine Fogertey, an options strategist.
Notwithstanding Wednesday’s trading session, when the CBOE Volatility Index
surged 46% in its biggest one-day pop since June, markets have been unusually quiet of late. The S&P 500
recently went 15 straight trading days without a move of 0.5%, its longest such streak in about 48 years, and the VIX itself remains at historically low levels. Even with Wednesday’s spike, it remains more than 20% below its long-term average of 20, and it recently closed at its lowest level in more than 23 years.
“The market is not pricing in sunshine and rainbows for all stocks,” Goldman wrote in a note to clients. “While we have written extensively about how fear metrics in the broad market are near record lows, there are some stocks where investor concerns are high.”
Whereas the average stock in the S&P 500 isn’t even in the 10th percentile rank of one-year implied volatility, the average for what Goldman dubbed “fear stocks” beyond the 70th percentile.
The five industrial names are: Dun & Bradstreet Corp.
Hertz Global Holdings Inc.
—which recently plummeted after a weak earnings report—Flowserve Corp.
and Xylem Inc.
The health-care names include: Spark Therapeutics Inc.
Alnylam Pharmaceuticals Inc.
Seattle Genetics Inc.
and Patterson Cos. Inc.
In addition to the specifics of the companies, both groups could face additional headwinds from political turmoil in Washington. Investors have bid the health-care and industrial sectors up on hopes that President Donald Trump would pass legislation—including infrastructure spending and health care reform—seen as beneficial to the groups. However, recent controversies have caused market participants to puts a lower likelihood that such initiatives will make it into law.
The remaining five include utility firm Dynegy Inc.
GNC Holdings Inc.
FleetCor Technologies Inc.
and two real estate companies: Macerich Co.
and Avalonbay Communities Inc.
“Fear levels are so high here that a 90% OTM [out of the money] put costs 12% on average for this group,” Goldman wrote. This is an indication that options traders are widely expecting these names to fall.
An OTM put option has a strike price that is lower than the market price of the stock.