What Are Options Traders Telling Us?

1.) CRACK SPREADS – No… not talking about some illicit drug running. But if you drive a car, heat your house, order packages from Amazon, or fly on an airplane, this matters to you. What is it? Something called the crack spread, and it’s exploding. Refineries buy crude oil, then they have to break apart the long, heavy molecules inside crude oil into smaller ones that people can actually use. This is cracking. Those smaller molecules become gasoline, diesel, jet fuel, and other products we use every day. One of the most common measurements in the industry is called the “3-2-1 crack spread.” It’s really not complicated. A refinery starts with “3” barrels of crude oil. On average, it turns those into about “2” barrels of gasoline and “1” barrel of diesel. 3-2-1. The crack spread simply measures how much more those finished products are worth than the crude oil that went into making them. From the refinery perspective, the bigger the gap between what you paid for the oil and what people are paying for the refined products, the happier you are. Today, that gap is getting much bigger. When refineries are making record profits, they don’t stop buying oil… they buy more. Strong crack spreads create a powerful incentive for refiners to buy more crude oil. So, will this increased demand create a move higher in the price of oil? So far it has not, and oil (WTI) is struggling at that $75/barrel level I mentioned this week. This “spread” is one of the reasons why we’re really not seeing gasoline prices drop much, even though oil is down over 30% from its highs. Our fearless leaders might want to think about building an advanced refinery or two to help refine the oil we keep sending overseas. I won’t hold my breath.

2.) PUT/CALL - I don’t discuss the equity Put/Call ratio much, but it is a helpful tool to see what kind of fear is lurking within markets, underneath the surface of price. In that regard, options traders hit peak fear yesterday. The Put/Call ratio was at 0.86, the most nervous they've been in 4 months. Yesterday, the bulls started taking back control. When the Put/Call ratio reached this extreme, the S&P 500 was higher 10 of 11 times 5 days later, with a median gain of 1.2%. The current level of the S&P 500 is near its high, so that could provide some short-term resistance. But this put buying, the protection, usually ends up getting washed out, which tends to result in buying. Macro shock possibilities are likely driving more of this fear than anything.

3.) EARNINGS – It has been said (and I can’t remember by whom – maybe Kudlow) that “earnings are the mother’s milk of the market… it’s needed to grow.” Right now, we’re seeing some powerful earnings revision momentum. US earnings revision momentum is at heights not seen since 2021 and has remained positive for the longest stretch since 2022. Earnings revision momentum is the count of MSCI US constituents with higher year-ahead EPS forecasts over the past three months minus those with lower forecasts, divided by the total number of revisions. Long-sounding equation… I know. But importantly, it stands at a supportive 21.2%.