Stocks Rise on Options Expiration Day...
7/18/2011 9:15:07 AM
Oversold conditions prompted buying on options expiration day...
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Stock Market Trends:
- ETF Positions indicated as Green are Long ETF positions and those indicated as Red are short positions.
- The State of the stock market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.
- The BIAS is used to determine how aggressive or defensive you should be with an ETF position. If the BIAS is Bullish but the stock market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that ETF trade on "weaker" signals than you might otherwise trade on as the stock market is predisposed to move in the direction of BIAS.
- At Risk is generally neutral represented by "-". When it is "Bullish" or "Bearish" it warns of a potential change in the BIAS.
- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.
Best ETFs to buy now (current positions):
Long DIA at $125.90
Long SPY at $134.43
Long QQQ at $58.20
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Value Portfolio:
We gained $1.19 per share for the TLT July $98 Calls when they expired worthless
on Friday.
We are long TBT at $32.50 from June 16th. (TBT closed at $32.73 on July 15th)
We sold short one contract TLT Aug $98 Calls at $1.80 per share on June 16th
We sold short one contract TLT Sep $98 Calls at $2.13 per share on June 16th
(TLT closed at $96.17on July 15th so the contracts we sold are nearly two dollars out of the money but with implied volatility still considerably lower than when we sold the options. Time value on all option contracts we sold continues to erode which means we can buy them back for less than we sold them for or, if price stays below $98.00, let them expire worthless and keep all the money).
Daily Trading Action
The major index ETFs opened higher and then plummeted for the first hour then reversed and moved higher the rest of the morning. The initial move was lower for the afternoon but that turned around with an hour and a half to go and the major indexes finished not far off from where they opened with the Dow slightly lower the NASDAQ-100 slightly higher, and the S&P-500 about even. That left the Dow and S&P-500 with fractional gains and the NASDAQ-100 tacked on a gain of one and one third of one percent. The Semiconductor Index (SOX 390.07 +2.31) joined in with a fractional gain, its best performance since Thursday of last week. The Russell-2000 (IWM 82.81 +0.55) posted a solid fractional gain as well. The Regional Bank Index (KRE 25.03 -0.08) lost one third of one percent while the Bank Index (KBE 23.07 =0.01) closed essentially flat. The Finance Sector ETF (XLF 14.85 -0.03) posted a modest fractional loss. Long term bonds (TLT 96.17 +0.16) recovered a modest gain after opening significantly lower. TLT is above all moving averages we regularly report on but the BIAS of longer term bonds in BEARISH and is in a trading state. NYSE trading volume was near average with 1.062B shares traded. NASDAQ share volume was light with 1.570B shares traded.
There were six economic reports of interest released:
- CPI (Jun) fell -0.2% versus an expected -0.1% fall
- Core CPI (Jun) rose +0.3% versus an expected +0.2% rise
- NY Empire State Manufacturing (Jul) came in at -3.76 versus an expected +1.0
- Industrial Production (Jun) rose +0.2% as expected
- Capacity Utilization (Jun) came in at 76.7% versus an expected 76.8%
- University of Michigan Consumer Sentiment (Jul) came in at 63.8 versus an expected 71.4
The first five reports were released before the open and the last report came out twenty-five minutes after the bell. While most of the reports came in close to expected values, Consumer Confidence is dropping faster than expected and manufacturing in New York is in contraction.
This was somewhat typical action for options expiration. That is to say that market participants weren't able to move the market based on economic reports or earnings. Instead, priced moved toward the "max pain" levels that would see the market makers who wrote option contracts see the "least pain" in terms of making good on any option contracts they wrote. With most option contracts they wrote expiring worthless, market makers once again put money in their pockets to the expense of option buyers and Monday we will see stocks trading without this influence.
The U.S. dollar eased about two tenths of one percent on the day.
The yield for the 10-year note fell three basis points to close at 2.91. The price of the near term futures contract for a barrel of oil rose $1.55 to close at $97.24.
Implied volatility for the S&P-500 (VIX 19.53 -1.27) fell more than six percent and the implied volatility for the NASDAQ-100 (VXN 20.95 -0.92) fell nearly five percent. We continue to believe that a reduction in implied volatility is likely to occur in the short term.
Tech (-1.0%), Industrials (-1.0%) and Materials (-0.9%) led the way lower as all ten economic sectors in the S&P-500 finished with losses.
Market internals were positive with advancers leading decliners 3:2 on both the NYSE and the NASDAQ. Up volume led down volume 3:2 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio rose +0.19 to close at 1.53. The equity put/call ratio fell -0.02 to close at 0.64.
Commentary:
Friday was all about price finishing at max pain levels. While this didn't occur for every stock, it did line up nicely with major index ETFs finishing at "max pain" levels. The focus will be split three ways in the coming week:
- U.S. Debt Ceiling negotiations to avoid a reduction to the U.S. AAA credit rating
- European sovereign debt stability and bailouts
- Q2 Earnings season where some 300 companies are set to report in the coming week
Trading action will likely reflect these fundamental issues and we find the major indexes are at key technical levels and are oversold. With July options expiration in the rear view mirror, trading will be highly influenced by the drama of the first two issues and daily rising and falling of individual securities as the report on Q2 earnings and provide guidance.
We continue to be concerned that the top for equities may already be in. With that said, we do expect an oversold bounce that could propel the major indexes up toward recent highs. The coming week is seasonally weak (no pun intended) but it follows a week that saw the major indexes closed a couple percent lower already. With all of the major indexes in trading states and having a BULLISH BIAS, we are looking for a catalyst to get a move higher started. There is a lot of energy built up for a large move one way or the other and we still believe that can be a move higher for equities.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
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Author: Mark McMillan
Mark McMillan
The McMillan Portfolio
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