BlackRock (BLK) Underperforms Surging Financial Sector

Investors have kept the share prices of BlackRock, Inc. (BLK) relatively range bound ahead of the company's fiscal fourth quarter earnings report. The BlackRock share price has recently trended to the lower end of the range, near a thin zone of support based on volume. Analysts predict the world's largest asset manager to report $10.08 in earnings per share (EPS) and $5.11 billion in revenue. These figures represent a decline in earnings but an increase in revenue on a year-over-year basis.

The financial sector has outperformed the market recently, as investors appear to be rotating into sectors positioned to benefit from rising interest rates. BlackRock has lagged its sector, falling 2.92% over the past month. This could be because BlackRock isn't positioned to benefit from rising interest rates the same as banks. The market overall has experienced a downturn, which could affect BlackRock as provider of the popular iShares exchange traded funds (ETFs).

At first glance, it appears that option traders are positioned for BlackRock stock to decline in the near term. While option trading volumes are relatively light, the BlackRock open interest suggests that traders anticipate downward movement from current support levels. That's because the price action has moved to the low end of its recent trading range, while option activity implies that traders are buying put options and selling calls.

Over the past month, BlackRock has lagged each of the top 10 holdings of State Street's Financial Sector ETF (XLF), with the exception of S&P Global (SPGI). This has been while the sector has overperformed the market as a whole, as investors have rotated into sectors positioned to benefit from inflation.

Volume Analysis

A comparison between price action and option trading can provide insight into the sentiment of traders and investors toward a company's performance in the near future. However, further context of price action in terms of volume could illustrate areas of support or resistance, which could provide context to option open interest. The chart below illustrates the recent price action of BlackRock, in addition to a price-based volume pattern on the left-hand side.

The recent trading range of the BlackRock share price is highlighted in blue. This range is fairly wide, topping out around the $940 level, with the low end of the range around $880. Interestingly, this trading range nearly coincides exactly with the heaviest areas of volume, as illustrated by the volume profile on the left-hand side.

This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.

Thin volume zones appear nearly exactly outside the recent trading range. The area in which volume appears the heaviest, which is nearly the middle of the most recent trading range, is known as the point of control. This identifies the price level where most trades took place. For BlackRock, the point of control appears on the chart around the $920 price level.

The BlackRock share price has recently been testing an area of thin volume around $880. This area has shown a pattern of buying just above this zone, gradually moving toward a pattern of selling below this area. This zone could prove to be a key area of support in the near term, with perhaps extended downside to the BlackRock share price if support fails.

Price Action and Options Outlook

An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward BlackRock stock. The chart below depicts the recent price action for the BlackRock share price as of Friday, Jan. 7.

The chart illustrates how the BlackRock share price has remained relatively range bound since December. The chart illustrates a continuation of an upward trend in November following a golden cross of the 20-day and 50-day moving averages, highlighted in blue and orange, respectively. In the middle of the month, the share price began to decline from an above average range before trading relatively range bound. Chart watchers may recognize a death cross of the respective moving averages in mid December, potentially highlighting a steeper selloff in the near term.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for BlackRock stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing. It's notable that these bands widened in early December and have since been narrowing. This could mean that option pricing is tightening ahead of BlackRock's earnings announcement.

This is interesting to note considering that current implied volatility is 48.7% above its 20-day historical volatility, suggesting that options markets are predicting future volatility to trade above the most recent 20-day realized volatility. The current implied move for earnings based on option straddle pricing is 3.7%. This is the highest implied earnings-based move for BlackRock stock in eight quarters.

In addition to the recent sideways trading of BlackRock, it appears that option traders are positioning themselves for the share price to fall in the future. That's because the open interest for BlackRock features over 41,000 put options compared to 20,000 calls. Recent trading volumes also favored puts over calls. However, these volumes are low enough to be considered inconclusive as opposed to an analysis of open interest numbers.

For Jan. 21, the next monthly expiration date for options, it appears that option traders are placing significant bearish bets on BlackRock. That's because the open interest features over 15,000 puts compared to 7,000 calls. That's a more than 2-to-1 ratio of puts to calls.

The single strike with the highest open interest for the Jan. 21 expiration is the $900 put, with 1,700. While this represents a 0.8% downside from the most recent BlackRock share price, it also represents 2.2% downside from the point of control of the volume profile indicator. Any significant follow-through below the $900 level could threaten to break the thin volume zone of support to the downside.

Recent Financial Sector Performance

BlackRock is a top-ten holding of State Street's Financial Sector ETF (XLF). The sector has recently outperformed the market at large. Over the last month, XLF has risen 5.5%, while State Street's S&P 500 Index ETF (SPY) has shed 1%. The chart below illustrates the recent performance of XLF compared to nine of the top sectors of the S&P 500.

It's notable on this chart that sector rotation appears to show that investors are positioning themselves to be prepared for the increase of interest rates to combat inflation. The top performing sectors—energy (XLE), consumer staples (XLP), XLF, and utilities (XLU)—are considered relatively "safer" bets during times of rising inflation and interest rates.

The worst performing stocks, technology (XLK) and consumer discretionary (XLY), typically underperform during times of high inflation—technology because of the drag of interest rates on companies with high amounts of debt, and consumer discretionary because of the assumption that consumers' buying power will be thinned, thus spending less money on wants as opposed to needs. The movement of funds could be traders and investors anticipating the next state of the economic cycle.

Inside the Financial Sector

The financial sector is a section of the economy made up of firms and institutions that provide financial services to commercial and retail customers. This sector comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms.

The financial sector is considered a good investment in a rising interest rate environment because companies in this sector tend to increase the rates they charge for loans they extend to others. Additionally, many of these companies have borrowed capital at a lower rate based on the market conditions of prior years. That creates a natural tailwind for any of the core financial activities at these companies.

The chart below compares the recent performance of BLK with the top holdings of State Street’s Financial Sector ETF (XLF). It helps to highlight how over the last month, and specifically since the start of 2022, individual stocks in the sector have been on the rise. In fact, of the top ten holdings of XLF, the only stock to post a loss over this period is BLK.

This chart helps to highlight how over the past month, and specifically since the start of 2022, individual stocks in the sector have been on the rise. In fact, of the top ten holdings of XLF, the only stock to post a loss over this period is BlackRock.

While an initial thought could be that BlackRock is underperforming because it is an asset manager and not a bank, it's notable that the top two best performers of the sector of late are also not banks—The Charles Schwab Corporation (SCHW) and Berkshire Hathaway Inc. (BRK.B).

Wrapping Up

Investors will be paying attention to the upcoming earnings of BlackRock as one of the first major companies to report earnings for the quarter. BlackRock has underperformed its surging sector of late. Option traders appear to be positioning themselves for further downside in the future for the BlackRock share price.