SCHW open interest could be options-related support
Last week, we unveiled Schaeffer’s Top Stock Picks of 2022, while also looking back at our more successful picks from 2021. At the risk of sounding like an infomercial, ‘but wait, there’s more!’ Founder and CEO Bernie Schaeffer has one more stock pick for 2022, and those familiar with this space will recognize the recent winner Charles Schwab Corporation (NYSE:SCHW).
Bank stocks and the financial sector have had a rip-roaring start to 2022, as the Federal Reserve lays out its taper and rate-hike plan for the year. As long as inflation needs to be combated and dovish policies are debated, stocks such as SCHW will always have macro tailwinds giving the sector a nudge.
Here’s what Bernie had to say about SCHW heading into 2022:
“In my June 2021 update for SCHW – my top pick for the year – I stated that I saw the potential for a 10% pullback to the $68-$69 area (from the peak earlier that month at $76). But I expected more in the way of all-time high action from SCHW in the second half of this year, with my first upside target in the $80-area (at which point the company would be sporting a market capitalization of about $150 billion). SCHW shares proceeded to put in a low just below $66 in July, before marching steadily higher all the way to a peak at $86.43 on Dec. 28, and then closing out the year at $84.10.
I also opined in that June 2021 update that the retail investor boom was just getting started, and in this regard, we turn back the clock and note another price peak in SCHW – this one at $49.26 in April 1999, back in the days of the so-called “dot-com boom” – a stock trading craze that never approached the level of individual investor market participation that we now routinely experience. And so with SCHW recently reporting a surge in total client assets of 23% from November 2020 to November 2021 (with the 2020 figure already inclusive of the big pop in assets from the TD Ameritrade merger), I now:1. Reiterate my belief that it’s still early days for the investor/investment boom we began to experience over this past year, and 2) Set an upside target for SCHW shares of $100-$110 for 2022 (which could result in a surge in its market capitalization to the $200 billion mark and beyond).
Moving from the fundamental side to the technical, a new “buy” signal has just been generated from SCHW’s 20-day Relative Momentum Index on its rally above the 70 mark (see second panel in chart below).
And on the sentiment front, we note that less than 1% of total open interest in SCHW options is currently at strike prices higher than the 90 level (source: CBOE’s Trade Alert). However, if SCHW shares continue to press higher as we expect, the result could be a deluge of new opening positions in SCHW call options at strikes of 100, 110 and higher – which could in itself create a surge in share buying in 2022 as option sellers look to hedge their big upside exposure.
*Note: This was written on Jan. 3, when SCHW was trading at $84.10 (see chart above). Clearly we’re off to a good start! SCHW has since crossed the $90 level but considering Bernie’s target was for $100-$110 for all of 2022, the bank stock still has room to run.”
Subscribers to Chart of the Week received this commentary on Sunday, January 9.