Expiration Calm
Thursday, May 20th, 2004 6:20pm EST
Coiling into Expiration
Bottom Line: Today’s range was one of the lowest for a pre-expiration day in a decade. After other occurrences, the S&P showed a positive bias on expiration day itself.
If we look at today’s range in the S&P 500 cash index, which is defined as the highest intraday price minus the lowest intraday price, then today’s number of about 7 points was very low. If we express that range in terms of where the index is currently trading, then we can see that today the S&P traveled about 0.7% of its current level (7 points divided by a close of 1089). Doing this allows us to more easily compare today’s range with those of days prior. A range of 7 points today, with the S&P at 1089, is a lot different than a range of 7 points ten years ago with the S&P at 480.
Looking at all days immediately prior to an option expiration since 1995, today’s range was about as low as they get. There were 11 other occurrences that were approximately equal to today’s exceedingly low range, and the next day (option expiration), the S&P showed a range of about 1% of price, equating now to about 11 points. The day after expiration showed a similar range. Interestingly, the day of expiration showed an average return of 0.5%, with 9 out of the 11 occurrences being positive (the two losses were for 0.3% and 0.2%). The day after expiration wasn’t as positive, as it showed a flat average return and 6 out of the 11 were positive. The last occurrence was on March 14th, 2002, after which the S&P went on to a 1.2% gain on expiration day.
I find that expiration days themselves are normally very boring, contrary to the hype associated with them by most media. The days surrounding expiry can have some wild swings, but expiration itself is typically quite muted. Precedent indicates there may be a slight upward bias to tomorrow’s action, but I wouldn’t read a whole lot into it.
Conclusion
Not surprisingly after a day like today, there is very little to go over tonight. Over the past week I have outlined many facts that I think warrant attention, such as market performance after sustained uptrends, heavy volume into ETFs compared to their underlying stocks, the historic level of current put/call ratios, the extreme volatility we’ve seen in the breadth figures, historic levels of oversold in many breadth indicators, etc. I have covered those topics extensively and don’t want to keep beating the same horse. So far we’ve been working off some of those data points by going sideways instead of up, which is perfectly acceptable as long as we don’t continue to deteriorate. The longer we chop around near the lows, however, the more likely I think it is that the lows will not hold and we will see another leg down. I would feel much more comfortable with long exposure if we could get some upside going in the next few days, to give more traders some confidence that these historic statistics might have some validity. In the meantime, I continue to feel that we have (or are about to) put in a low from which gains of 10% - 15% over the next several months are probable.
In the short-term, once again it is difficult to define any sort of objective edge. Our shortest-term guides remain mostly neutral after becoming very slightly overbought yesterday morning. An ominous sign is when a market heads lower immediately after becoming even slightly overbought, so yesterday’s reversal was not encouraging. However, as long as hang around these levels over the next couple of days and don’t give up too much, I wouldn’t want to press the short side.
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
Disclosure: no positions
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
© 2004 Sundial Capital Research, Inc. All Rights Reserved.