Indicator of the Week: April Expiration Week
By Rocky White, Senior Quantitative Analyst
Foreword: At the end of this week, equity options are set to expire. The table below shows that expiration week has tended to be a bit bearish over the last couple of years -- averaging a slight loss, with 52% of those weeks being positive. One misconception about expiration week is that it is always highly volatile. It is assumed that traders exiting option trades and rolling new positions -- along with the hedging of new positions, or taking off hedges -- naturally leads to big market fluctuations. However, measuring volatility by standard deviation of returns, you see expiration weeks are actually less volatile than other weeks. Perhaps the potential for volatility is there, but over the last couple of years, it has not actually been realized.
Day of the Week: So where does expiration week go wrong? Below, I show how each day has fared during expiration week. One thing that stands out is that, despite a high percentage of days being positive, the week itself averages a negative return (see table above). For example, 67% of Thursdays during expiration week have been positive, but the average return on Thursday is actually a loss of 0.11%. This tells us there were some pretty dramatic down days on Thursdays. Friday also averages a loss, although 70% of those days have been positive.
This next table shows the last five expiration weeks by day, along with the return for the week. Note that in each of the last four expiration weeks, both Thursday and Friday are positive.
This Coming Week: These last couple of weeks have been tough for the market. The S&P 500 Index (SPX) has shed about 2% so far during the April expiration cycle. There has not been a negative cycle heading into expiration since August 2011. Looking back to 2010 again, the table below shows this is not a good omen for expiration week. When the cycle is negative heading into those last five days, expiration week has typically extended the losses, with the SPX dropping, on average, another 1.5%. The index managed a positive finish only two out of six times in those situations. If the cycle is positive, then expiration week averages a gain, and is positive over half the time.
Below are the six instances when the SPX was sitting on a loss for the expiration cycle heading into its final week.
This Week's Key Events: Dow Earnings, Manufacturing Data Set to Move Markets
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.
The week gets started with a flurry of economic reports, including retail sales, business inventories, the Empire State manufacturing index, and the National Association of Home Builders (NAHB) housing market index. A busy week of earnings begins with quarterly results from Citigroup (C), Mattel (MAT), Charles Schwab (SCHW), and Gannett (GCI).
Tuesday's calendar features data on housing starts and building permits, as well as industrial production and capacity utilization. The earnings arena will see action from IBM (IBM), Intel (INTC), Johnson & Johnson (JNJ), Coca-Cola (KO), U.S. Bancorp (USB), Goldman Sachs (GS), Yahoo (YAHOO), Cree (CREE), State Street (STT), Intuitive Surgical (ISRG), Linear Technology (LLTC), and McMoRan Exploration (MMR).
The usual report on weekly crude inventories is due out Wednesday, and Wall Street will also hear the latest earnings from American Express (AXP), eBay (EBAY), Yum Brands (YUM), Marriott (MAR), Bank of New York Mellon (BK), BlackRock (BLK), Cubist Pharmaceuticals (CBST), F5 Networks (FFIV), Halliburton (HAL), Huntington Bancshares (HBAN), Qualcomm (QCOM), SLM Corp. (SLM), and VMware (VMW).
Thursday's docket includes weekly jobless claims, existing home sales, the Philadelphia Fed's manufacturing index, and the Conference Board's index of leading economic indicators. Earnings season kicks into high gear, with quarterly results due out from Bank of America (BAC), DuPont (DD), Microsoft (MSFT), Travelers (TRV), Verizon (VZ), Advanced Micro Devices (AMD), Southwest Airlines (LUV), Capital One (COF), Chipotle Mexican Grill (CMG), Freeport-McMoRan Copper & Gold (FCX), Philip Morris (PM), SanDisk (SNDK), Nokia (NOK), Peabody Energy (BTU), EMC Corp. (EMC), Morgan Stanley (MS), and New York Times (NYT).
There are no major economic reports scheduled for Friday, but Wall Street will mull over earnings results from General Electric (GE), McDonald's (MCD), Under Armour (UA), Honeywell (HON), Kimberly-Clark (KMB), and Schlumberger (SLB).
And now a few sectors of note...
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.
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