Langlui's Big Board and Options Plays

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<Page 2>Indicator of the Week: Five-Week Expiration Cycles
By Rocky White, Senior Quantitative Analyst

Foreword: Last Friday was the final trading day before July-dated equity options expired. So, this week starts the August expiration cycle. Most cycles are four weeks long, but a few times every year, you get five-week cycles -- which is what we have to look forward to with the August options series. Below, we'll take a quick look at how the market usually fares during each monthly expiration cycle, and compare those oddball five-week cycles to the more common four-week cycles.

Monthly Expiration Cycles: The table below summarizes S&P 500 Index (SPX) returns for each monthly expiration cycle since 2000. The August expiration cycle is the third-best return of all the months (only April and December are better). However, the median return is not as impressive, with August weighing in at just 7th -- and neither is the percent positive, when compared against all other months. That healthy average return is boosted by a couple of outsized returns of more than 9% in 2002 and 2009.



Four- and Five-Week Cycles: As I mentioned earlier, this particular August happens to be a five-week expiration cycle. The first table below shows how the extended cycles have performed against four-week cycles. Since 2006, the five-week cycles have underperformed, averaging a significantly negative return of -0.43%. Four-week cycles are far better, averaging a gain of 0.51%.



While the longer-term cycles have been bearish since 2006, this has not been the case more recently. Below is a table showing all expiration-cycle returns since 2010, with the five-week cycles bolded. After a couple of tough cycles in February and May 2010, the last four extended cycles have been positive, and the last three have been positive by at least 1%. Hopefully, this more recent trend continues for us.



This Week's Key Events: Housing Data and Blue-Chip Earnings on Deck
Schaeffer's Editorial Staff

Here is a brief list of some of the key events this 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

The economic calendar kicks off with NAHB's housing market index for July. IBM (IBM), Charles Schwab (SCHW), Gannett Co. (GCI), Halliburton (HAL), Hasbro (HAS), Steel Dynamics (STLD), and Zions Bancorporation (ZION) are expected to report earnings.

Tuesday

Housing data continues on Tuesday, with the release of home starts and building permits for June. The day's earnings docket includes Apple (AAPL), Coca-Cola Co. (KO), Bank of America (BAC), Goldman Sachs (GS), Chipotle Mexican Grill (CMG), Johnson & Johnson (JNJ), Peabody Energy (BTU), UnitedHealth Group (UNH), and Yahoo (YHOO).

Wednesday

Existing home sales for June will hit the Street on Wednesday, along with the usual update on U.S. petroleum supplies. On the earnings front, we'll hear from American Express (AXP), Altria Group (MO), Intel (INTC), eBay (EBAY), F5 Networks (FFIV), Qualcomm (QCOM), and Xilinx (XLNX).

Thursday

A flurry of data will be released Thursday, including weekly jobless claims, the Philly Fed index for July, and the Conference Board's index of leading economic indicators for June. Notable earnings reporters include AT&T (T), Microsoft (MSFT), Advanced Micro Devices (AMD), Eli Lilly (LLY), Morgan Stanley (MS), PepsiCo (PEP), Travelers Companies (TRV), and SanDisk (SNDK).

Friday

There are no major economic reports scheduled for Friday. Caterpillar (CAT), General Electric (GE), Honeywell (HON), Verizon Communications (VZ), Xerox (XRX), Reynolds American (RAI), and Schlumberger (SLB) are scheduled to confess their quarterly earnings.

And now a few sectors of note...

Dissecting The Sectors

Sector
Leisure/Retail
Bullish

Outlook: Despite ongoing concerns about consumer spending habits, headline retail sales edged higher in June, defying expectations for a modest decline. On the charts, the SPDR S&P Retail ETF (XRT) remains in a longer-term uptrend. The fund is up 12.3% since the start of 2011 -- easily outperforming the major market indexes -- and XRT found a new all-time high of $56.44 earlier this month. Plus, XRT's 50-day buy-to-open put/call volume ratio is turning higher, which has previously been consistent with periods of technical strength. Nevertheless, plenty of pessimism is still levied against the consumer discretionary group. Our data reveals that restaurants boast the largest percentage of stocks above their 200-day moving average, yet less than half of the cumulative analyst ratings are "buys." With so much negativity surrounding this outperforming sector, it seems there's plenty of cash still on the sidelines that could flow in to support additional upside. A few retail/leisure stocks we favor include Chipotle Mexican Grill (CMG), Crocs (CROX), and Green Mountain Coffee Roasters (GMCR), all of which have excelled on the charts in 2011. Despite the positive price action, all three equities are heavily shorted -- raising the possibility of short-covering support amid continued technical strength. Among Internet-based discretionary stocks, both Amazon.com (AMZN) and Netflix (NFLX) are appealing. This duo has been exploring all-time highs in 2011, yet we continue to see evidence of lingering skepticism. As these equities continue to outperform, a shift in sentiment toward the bullish camp could contribute to future gains. For more ideas on how to play the consumer discretionary sector, check out our "Sentiment Report" in the Summer 2011 issue of SENTIMENT magazine.

Sector
Real Estate
Bullish

Outlook: Real estate is Wall Street's perennial underdog, but the robust price action in this sector demands a second look from contrarians. The iShares Dow Jones U.S. Real Estate Index Fund (IYR) is up more than 9% this year, comfortably surpassing the major market indexes. In fact, 80% of stocks in the real estate sector are trading above their benchmark 200-day moving averages -- the fifth-highest percentage among the sectors we track. Despite this broad-based technical strength, only 41% of analyst ratings on real estate stocks are of the "buy" variety -- which happens to be the third-lowest percentage among the more than 40 industry groups we follow. As IYR continues to climb the charts, a round of upgrades could help to attract some buying interest to this underappreciated sector.

Sector
Large-Cap Tech
Bearish

Outlook: Big-cap tech continues to underwhelm, despite enthusiasm over a stronger-than-forecast earnings report from Google (GOOG) on Friday. The search giant popped nearly 13% higher after topping consensus estimates -- but with GOOG's short-interest ratio standing at exactly one day to cover, and 89% of analysts already deeming the stock worthy of a "buy" or better rating, the post-earnings rally may prove to be short-lived. In fact, GOOG's upside surprise could raise expectations for the rest of the tech sector this earnings season, setting the stage for potential disappointments. Within the group, Dow component Cisco Systems (CSCO) is one of the most high-profile underperformers. Many Wall Street pundits cited the stock as a "bargain" following a bearish gap in February -- but the stock has since tumbled to a string of new multi-year lows. A Google-inspired bounce on Friday only served to propel CSCO directly into resistance at its 10-week moving average, suggesting the stock's downtrend remains firmly intact. Meanwhile, fellow Dow member Microsoft (MSFT) is sitting on loss of 4.2% for the year, lagging the 7.8% gain collected by its parent index. Nevertheless, 66% of brokerage firms maintain an optimistic rating on the underperforming tech issue -- opening the door for potential downgrades in the event of continued technical weakness. Even more compelling, the 50-day buy-to-open put/call volume ratio for the PowerShares QQQ Trust (QQQ) has pulled back sharply from its recent peak, which could be a sign that big-money players are no longer accumulating shares.

Sector
Financials
Bearish

Outlook: There was much ado about the latest earnings reports from Citigroup (C) and JPMorgan Chase (JPM) this past week, as drastically lowered expectations from analysts paved the way for both banks to surpass consensus estimates. However, C and JPM showed a serious lack of follow-through in the wake of their respective "well-received" reports. In fact, the Financial Select Sector SPDR (XLF) took a 4% hit over the course of the week, surrendering a hard-won foothold above its 10-week moving average in the process. This trendline now seems poised to resume its months-long role as resistance. Traders should keep an eye out for more bank earnings this coming week, when sector peers Goldman Sachs (GS), Bank of America (BAC), and Morgan Stanley (MS) are due to confess their quarterly results. Checking out the sentiment backdrop, the 50-day buy-to-open put/call volume ratio for the XLF remains depressed, suggesting that big-money players are still on the sidelines. Plus, data from Zacks indicates that 59% of analyst ratings on finance stocks are of the "buy" or better variety, despite the dismal price action. Going forward, these underperforming bank stocks look vulnerable to additional downside as this remaining optimism is shaken out.