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Sunday, September 12, 2010 7:31:10 PM
Monday Morning Outlook: Can DJIA Maintain Perch Above 200-Day Moving Average?
Sorting out the myths and facts of expiration week
by Todd Salamone 9/11/2010 11:13 AM
http://www.schaeffersresearch.com/commentary/content/monday+morning+outlook+can+djia+maintain+perch+above+200-day+moving+average/observations.aspx?ID=102233#102233
The September rally continued into a second week, although just barely. In fact, even though the Dow Jones Industrial Average has advanced in seven of the last eight sessions, it eked out a tiny gain of only 0.1% last week, settling at 10,462.77. Looking ahead, Todd Salamone, Senior Vice President of Research, wonders if there's any rally fuel left in the tank following the last two weeks, and considers the possibility of mean reversion. Next, Senior Quantitative Analyst Rocky White reports that next week is triple-witching expiration week (aka quadruple-expiration week, but Rocky is Old School.) Triple-witching week may have a scary reputation, but Rocky finds that triple-witching weeks are positive 72% of the time. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: Running in Place
By Joseph Hargett, Senior Equities Analyst
The fall political campaigns officially kicked off on Labor Day, but unless you're a political junkie, the holiday-shortened week didn't offer much in the way of drama. News was light, as was trading volume. Nonetheless, traders were encouraged by the faintest glimmers of economic recovery, as fears of a double-dip recession began to fade.
The market stumbled to begin the week on Tuesday after the Wall Street Journal reported that recent stress tests did not completely reveal the levels of risky debt held by European banks. That was enough to slow the September mini-rally. The Dow Jones Industrial Average gave up 107 points, or 1.03%.
The smelling salts came out Wednesday, after a successful auction of Portuguese debt eased concerns about Europe's fiscal health. Traders remained cautious, however, especially after the Federal Reserve's Beige Book report confirmed that the economic recovery remains weak. The Dow added 0.45% for the day.
The Labor Department revealed early Thursday that initial jobless claims fell more than expected. That's all the bulls needed to hear to stoke a morning rally. However, fears about Europe's fiscal health were revived in the afternoon when it was reported Deutsche Bank (DB) might have to raise up to $11.4 billion in capital. The bulls still managed a slight win on the day, with the Dow advancing 0.27%.
Friday's action was a microcosm of the previous several weeks: better-than-expected economic data, in this case on wholesale inventories, amid lingering concerns about the economy. President Obama got into the act by reminding a press conference that the recovery has been "painfully slow." The Dow notched a 0.5% gain for the day, and it needed every bit of that to record a W for the week, advancing a measly 0.1%. Nonetheless, technicians cheered two developments: the Dow finished above resistance at its 200-day moving average, and it managed a second weekly close above its 20-week moving average. Meanwhile, the S&P 500 Index added 0.5% for the week, finishing at 1,109.55, and the Nasdaq Composite recorded a weekly gain of 0.4%, settling at 2,242.48.
What the Trader Is Expecting in the Coming Week: Mean Reversion a Possibility
By Todd Salamone, Senior Vice President of Research
"From a shorter-term perspective, there is a tremendous amount of put open interest just below current levels on major exchange-traded funds that we follow. If the market stabilizes during the next few days, short covering related to expiring put open interest in the next few weeks could support a rally from SPX 1,040, the lower boundary of the current trading range..."
- Monday Morning Outlook, Aug. 28, 2010
In a nutshell, not a lot has changed from last week, with the market recovering from Tuesday's sell-off to close slightly higher on the week. Triple-witching expiration week is upon us, and Rocky White provides some interesting statistics for you to chew on in the section below.
If indeed the rally from S&P 500 Index (SPX) 1,040 to the high of 1,110 last week can be attributed to short covering, one might come into the week wondering, "What is left in the tank?" This is a fair question for several reasons.
After all, now that key indexes come into this week sitting significantly above the biggest put open interest strikes in the September series, and considering that there is only one week left until expiration, you can assume the short covering related to that put open interest is a thing of the past.
Plus, if you are playing the mean-reversion game, you will note that the SPX comes into the week:
1. Trading higher in seven of the last eight trading days
2. Sitting near the top of a long trading range
3. Trading just below the convergence of its 160-day and 200-day moving averages
Could we be putting too much emphasis on the current winning streak? There have been four other occasions in 2010 in which the SPX rallied in seven of eight trading days. The first eight trading days of the year began this way, and there were similar streaks in March, April, and July. The January and July streaks ended with giant thuds within one to five days. But the March and April "signals" did not end with a mean-reverting decline in the immediate term, although mean reversion began taking shape in a major way one week after the April signal.
With the SPX at 1,050 two weeks ago, we noted that retail investors had become very gloomy, as was evident by the weekly American Association of Individual Investors' survey. At the time, only 20% of those surveyed had a bullish outlook on the equity market, which we viewed as a potential contrarian bull signal. At present, 40% of those surveyed are bullish, which doubles the reading of only two weeks ago. Given the poor track record of this group during the past several months, a contrarian's antennae might perk up: this sudden movement into the bullish camp is a risk worth noting following the 5% advance since the end of August.
Setting the tone for next week could be weekend news flow from China, which moved up the release date of various economic indicators to Saturday from Monday. For example, monthly figures on industrial production, fixed-asset investment, wholesale inflation and consumer inflation data will be reported on Saturday. This has led some to speculate that China's central bank could be planning an interest rate increase before the markets open on Monday, in response to inflationary pressures.
With the CBOE Market Volatility Index (VIX) trading around its lowest level since the "flash crash" of early May, and implied volatility on many equity options trading near multi-week lows, now is a good time to buy put protection for long positions you are interested in protecting. Should the market break out from this range, we think a breakout will be to the upside. But sharp, quick pullbacks are still a possibility amid signs that deep-pocketed institutional players, including hedge funds, are not in an accumulation phase.
Another way to hedge long positions against a short-term equity market decline is to take advantage of the pullback in the bond market by going long the iShares Trust Barclays 20+ Year Treasury Bond (TLT). Bonds have been among the strongest assets in 2010 amid cries of a "bubble," but they have been mired in a pullback since late August. Last week's pullback to the 102 area looks appealing, as the 102 strike is the site of peak put open interest in the September series, which could serve as options-related support. Additionally, the 102 area is the site of the TLT's 50-day moving average and a former resistance level in July 2010. Hedge funds have been scooping up bonds in 2010, and a risk to this play is that these players suddenly liquidate long positions.
If you enjoy Monday Morning Outlook...
...we also offer a free Market Recap after the close every day. Did the Dow go up 100 points? Or down? We'll tell you why. We'll also tell you who the big winners and losers were, and we'll share some highlights from our daily articles and blog postings. Market Recap is a quick, but insightful read. Sign up here to have Market Recap delivered straight to your inbox every evening shortly after the close.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
Indicator of the Week: Triple-Witching Expiration
By Rocky White, Senior Quantitative Analyst
Foreword: The upcoming week is a triple-witching expiration week. Not only are equity options expiring, but so are stock index futures and stock market index options. Additionally, single stock futures expire, so triple-witching expiration is also commonly referred to as quadruple-witching expiration. This week I'll take a look at how the market has performed during these special expiration weeks. Also, with all the activity going on (closing expiring contracts and opening up new ones to replace them), pundits often suggest preparing for increased volatility. We'll take a look at the numbers to see just how volatile we can expect this week to be.
Triple-Witching Week: Below is a table comparing triple-witching expiration weeks since 2006 to other expiration weeks and to nonexpiration weeks. The 18 triple-witching expirations have vastly outperformed other weeks. Typical nonexpiration weeks average a slight loss, and are positive only half the time. Ordinary expiration weeks average a slightly bigger loss, and are positive 55% of the time. Triple-witching weeks, though, are positive 72% of the time, averaging a gain of 0.82%.
Low Volatility? One of the more noteworthy numbers in the table above is the standard deviation of returns. Triple-witching expirations have a reputation for being volatile, but the numbers show far less volatility during these weeks than other weeks.
Is volatility actually that depressed during these weeks? Not necessarily. Look at the table below. Here I summarize the data the same as above but on a daily basis rather than on a weekly basis. The daily volatility during triple-witching expiration week is 1.60%, which is about the same as nonexpiration weeks, and a bit less than other expirations. So on a daily basis, you can expect typical market volatility, but on a weekly basis the market barely moves. This leads to the conclusion that mean reversion is typical during these weeks. If the market goes up early in the week, then it's likely to go down later in the week, and vice versa. This could be the result of the various market players defending key strike prices throughout the week.
Freaky Friday: Finally, I wanted to mention what many call "Freaky Friday." That's the day all those contracts mentioned above expire. Despite its scary name, the last day during triple-witching week strongly outperforms the last day of other weeks. Again, you may hear from the talking heads or elsewhere that you need to prepare for elevated volatility, but the numbers just don't back this claim up.
This Week's Key Events: Consumer Price Index Due on Friday
By Joseph Hargett, Senior Equities Analyst
Here is a brief list of some of the key events for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* U.S. budget figures for August are due from the Treasury Department on Monday. K12 Inc. (LRN) will report earnings.
Tuesday
* The Commerce Department will report on August retail sales and July business inventories. Best Buy Co. Inc. (BBY), Cracker Barrel Old Country Store Inc. (CBRL), The Kroger Co. (KR), and Pall Corp. (PLL) are scheduled to report earnings.
Wednesday
* The New York Fed will report on September manufacturing activity in the New York region on Wednesday. Back in Washington, the Fed will report on industrial production in August, and we'll also get the usual weekly report on U.S. petroleum supplies. CLARCOR Inc. (CLC) and The Dress Barn Inc. (DBRN) will post their quarterly results.
Thursday
* We'll get the weekly report on new jobless claims, the producer price index for August, and the Philadelphia Fed's report on manufacturing activity in that region. FedEx Corp. (FDX), Pier 1 Imports Inc. (PIR), Oracle Corp. (ORCL), and Research In Motion Limited (RIMM) will report earnings.
Friday
* The Labor Department will deliver the August consumer price index, while the University of Michigan will give its first peek at consumer sentiment in September. There are no earnings reports scheduled for Friday.
Sorting out the myths and facts of expiration week
by Todd Salamone 9/11/2010 11:13 AM
http://www.schaeffersresearch.com/commentary/content/monday+morning+outlook+can+djia+maintain+perch+above+200-day+moving+average/observations.aspx?ID=102233#102233
The September rally continued into a second week, although just barely. In fact, even though the Dow Jones Industrial Average has advanced in seven of the last eight sessions, it eked out a tiny gain of only 0.1% last week, settling at 10,462.77. Looking ahead, Todd Salamone, Senior Vice President of Research, wonders if there's any rally fuel left in the tank following the last two weeks, and considers the possibility of mean reversion. Next, Senior Quantitative Analyst Rocky White reports that next week is triple-witching expiration week (aka quadruple-expiration week, but Rocky is Old School.) Triple-witching week may have a scary reputation, but Rocky finds that triple-witching weeks are positive 72% of the time. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: Running in Place
By Joseph Hargett, Senior Equities Analyst
The fall political campaigns officially kicked off on Labor Day, but unless you're a political junkie, the holiday-shortened week didn't offer much in the way of drama. News was light, as was trading volume. Nonetheless, traders were encouraged by the faintest glimmers of economic recovery, as fears of a double-dip recession began to fade.
The market stumbled to begin the week on Tuesday after the Wall Street Journal reported that recent stress tests did not completely reveal the levels of risky debt held by European banks. That was enough to slow the September mini-rally. The Dow Jones Industrial Average gave up 107 points, or 1.03%.
The smelling salts came out Wednesday, after a successful auction of Portuguese debt eased concerns about Europe's fiscal health. Traders remained cautious, however, especially after the Federal Reserve's Beige Book report confirmed that the economic recovery remains weak. The Dow added 0.45% for the day.
The Labor Department revealed early Thursday that initial jobless claims fell more than expected. That's all the bulls needed to hear to stoke a morning rally. However, fears about Europe's fiscal health were revived in the afternoon when it was reported Deutsche Bank (DB) might have to raise up to $11.4 billion in capital. The bulls still managed a slight win on the day, with the Dow advancing 0.27%.
Friday's action was a microcosm of the previous several weeks: better-than-expected economic data, in this case on wholesale inventories, amid lingering concerns about the economy. President Obama got into the act by reminding a press conference that the recovery has been "painfully slow." The Dow notched a 0.5% gain for the day, and it needed every bit of that to record a W for the week, advancing a measly 0.1%. Nonetheless, technicians cheered two developments: the Dow finished above resistance at its 200-day moving average, and it managed a second weekly close above its 20-week moving average. Meanwhile, the S&P 500 Index added 0.5% for the week, finishing at 1,109.55, and the Nasdaq Composite recorded a weekly gain of 0.4%, settling at 2,242.48.
What the Trader Is Expecting in the Coming Week: Mean Reversion a Possibility
By Todd Salamone, Senior Vice President of Research
"From a shorter-term perspective, there is a tremendous amount of put open interest just below current levels on major exchange-traded funds that we follow. If the market stabilizes during the next few days, short covering related to expiring put open interest in the next few weeks could support a rally from SPX 1,040, the lower boundary of the current trading range..."
- Monday Morning Outlook, Aug. 28, 2010
In a nutshell, not a lot has changed from last week, with the market recovering from Tuesday's sell-off to close slightly higher on the week. Triple-witching expiration week is upon us, and Rocky White provides some interesting statistics for you to chew on in the section below.
If indeed the rally from S&P 500 Index (SPX) 1,040 to the high of 1,110 last week can be attributed to short covering, one might come into the week wondering, "What is left in the tank?" This is a fair question for several reasons.
After all, now that key indexes come into this week sitting significantly above the biggest put open interest strikes in the September series, and considering that there is only one week left until expiration, you can assume the short covering related to that put open interest is a thing of the past.
Plus, if you are playing the mean-reversion game, you will note that the SPX comes into the week:
1. Trading higher in seven of the last eight trading days
2. Sitting near the top of a long trading range
3. Trading just below the convergence of its 160-day and 200-day moving averages
Could we be putting too much emphasis on the current winning streak? There have been four other occasions in 2010 in which the SPX rallied in seven of eight trading days. The first eight trading days of the year began this way, and there were similar streaks in March, April, and July. The January and July streaks ended with giant thuds within one to five days. But the March and April "signals" did not end with a mean-reverting decline in the immediate term, although mean reversion began taking shape in a major way one week after the April signal.
With the SPX at 1,050 two weeks ago, we noted that retail investors had become very gloomy, as was evident by the weekly American Association of Individual Investors' survey. At the time, only 20% of those surveyed had a bullish outlook on the equity market, which we viewed as a potential contrarian bull signal. At present, 40% of those surveyed are bullish, which doubles the reading of only two weeks ago. Given the poor track record of this group during the past several months, a contrarian's antennae might perk up: this sudden movement into the bullish camp is a risk worth noting following the 5% advance since the end of August.
Setting the tone for next week could be weekend news flow from China, which moved up the release date of various economic indicators to Saturday from Monday. For example, monthly figures on industrial production, fixed-asset investment, wholesale inflation and consumer inflation data will be reported on Saturday. This has led some to speculate that China's central bank could be planning an interest rate increase before the markets open on Monday, in response to inflationary pressures.
With the CBOE Market Volatility Index (VIX) trading around its lowest level since the "flash crash" of early May, and implied volatility on many equity options trading near multi-week lows, now is a good time to buy put protection for long positions you are interested in protecting. Should the market break out from this range, we think a breakout will be to the upside. But sharp, quick pullbacks are still a possibility amid signs that deep-pocketed institutional players, including hedge funds, are not in an accumulation phase.
Another way to hedge long positions against a short-term equity market decline is to take advantage of the pullback in the bond market by going long the iShares Trust Barclays 20+ Year Treasury Bond (TLT). Bonds have been among the strongest assets in 2010 amid cries of a "bubble," but they have been mired in a pullback since late August. Last week's pullback to the 102 area looks appealing, as the 102 strike is the site of peak put open interest in the September series, which could serve as options-related support. Additionally, the 102 area is the site of the TLT's 50-day moving average and a former resistance level in July 2010. Hedge funds have been scooping up bonds in 2010, and a risk to this play is that these players suddenly liquidate long positions.
If you enjoy Monday Morning Outlook...
...we also offer a free Market Recap after the close every day. Did the Dow go up 100 points? Or down? We'll tell you why. We'll also tell you who the big winners and losers were, and we'll share some highlights from our daily articles and blog postings. Market Recap is a quick, but insightful read. Sign up here to have Market Recap delivered straight to your inbox every evening shortly after the close.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
Indicator of the Week: Triple-Witching Expiration
By Rocky White, Senior Quantitative Analyst
Foreword: The upcoming week is a triple-witching expiration week. Not only are equity options expiring, but so are stock index futures and stock market index options. Additionally, single stock futures expire, so triple-witching expiration is also commonly referred to as quadruple-witching expiration. This week I'll take a look at how the market has performed during these special expiration weeks. Also, with all the activity going on (closing expiring contracts and opening up new ones to replace them), pundits often suggest preparing for increased volatility. We'll take a look at the numbers to see just how volatile we can expect this week to be.
Triple-Witching Week: Below is a table comparing triple-witching expiration weeks since 2006 to other expiration weeks and to nonexpiration weeks. The 18 triple-witching expirations have vastly outperformed other weeks. Typical nonexpiration weeks average a slight loss, and are positive only half the time. Ordinary expiration weeks average a slightly bigger loss, and are positive 55% of the time. Triple-witching weeks, though, are positive 72% of the time, averaging a gain of 0.82%.
Low Volatility? One of the more noteworthy numbers in the table above is the standard deviation of returns. Triple-witching expirations have a reputation for being volatile, but the numbers show far less volatility during these weeks than other weeks.
Is volatility actually that depressed during these weeks? Not necessarily. Look at the table below. Here I summarize the data the same as above but on a daily basis rather than on a weekly basis. The daily volatility during triple-witching expiration week is 1.60%, which is about the same as nonexpiration weeks, and a bit less than other expirations. So on a daily basis, you can expect typical market volatility, but on a weekly basis the market barely moves. This leads to the conclusion that mean reversion is typical during these weeks. If the market goes up early in the week, then it's likely to go down later in the week, and vice versa. This could be the result of the various market players defending key strike prices throughout the week.
Freaky Friday: Finally, I wanted to mention what many call "Freaky Friday." That's the day all those contracts mentioned above expire. Despite its scary name, the last day during triple-witching week strongly outperforms the last day of other weeks. Again, you may hear from the talking heads or elsewhere that you need to prepare for elevated volatility, but the numbers just don't back this claim up.
This Week's Key Events: Consumer Price Index Due on Friday
By Joseph Hargett, Senior Equities Analyst
Here is a brief list of some of the key events for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* U.S. budget figures for August are due from the Treasury Department on Monday. K12 Inc. (LRN) will report earnings.
Tuesday
* The Commerce Department will report on August retail sales and July business inventories. Best Buy Co. Inc. (BBY), Cracker Barrel Old Country Store Inc. (CBRL), The Kroger Co. (KR), and Pall Corp. (PLL) are scheduled to report earnings.
Wednesday
* The New York Fed will report on September manufacturing activity in the New York region on Wednesday. Back in Washington, the Fed will report on industrial production in August, and we'll also get the usual weekly report on U.S. petroleum supplies. CLARCOR Inc. (CLC) and The Dress Barn Inc. (DBRN) will post their quarterly results.
Thursday
* We'll get the weekly report on new jobless claims, the producer price index for August, and the Philadelphia Fed's report on manufacturing activity in that region. FedEx Corp. (FDX), Pier 1 Imports Inc. (PIR), Oracle Corp. (ORCL), and Research In Motion Limited (RIMM) will report earnings.
Friday
* The Labor Department will deliver the August consumer price index, while the University of Michigan will give its first peek at consumer sentiment in September. There are no earnings reports scheduled for Friday.
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