Video game stock Electronic Arts (EA) has traded in a tight range for the past few months, despite receiving a price-target hike to $115 from $111 at Credit Suisse last week. That target may be difficult to hit in the short term, with EA flashing two historically reliable bearish signals.
More specifically, the security is now within one standard deviation of its 320-day moving average after a lengthy stretch below the trendline, defined for this study as having traded south of the moving average 60% of the time in the past two months and in eight of the last 10 trading days. This signal has flashed two other times in the past few years, per Schaeffer's Senior Quantitative Analyst Rocky White, resulting in an average one-month loss of 4.2%, with neither of the returns positive.
On top of that, Electronic Arts is one of the worst stocks to own in November, looking back 10 years at current S&P 500 components. According to White, the equity has ended the month higher just 30% of the time and has averaged a loss of roughly 2.6%. From its current perch at $95.50, the average pullback of 4.2% from the 320-day signal could have the shares below the year-over-year breakeven level.
Another thing to consider is Electronic Arts’ fiscal second-quarter earnings report, set for after-the-close today. EA shares have moved lower the day after four of the last eight earnings releases, including a 4.1% pullback a year ago around this time. On average, the stock has moved 5.7% in the session after earnings, regardless of direction, looking back two years. This time around, the options market is pricing in a bigger 10.5% swing for the video game stock.
Options traders have leaned toward bearish expectations. The equity's Schaeffer's put/call open interest ratio (SOIR) stands at 1.02, which ranks in the 100th annual percentile. This shows that traders targeting options that expire within three months are unusually put-heavy at the moment.
