Shorts' Post-Fed Shock Could Lead to More Upside

Triple-witching expiration week could bode well for bulls

by 9/15/2012 9:50:35 AM
Stocks quoted in this article:
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Indicator of the Week: Expiration Week
By Rocky White, Senior Quantitative Analyst

Foreword: Option traders know that this coming Friday is the third Friday of the month, meaning options on equities expire. Additionally, it's a triple-witching expiration week, meaning stock index futures and stock index options also expire. As such, I'm taking an historical look at what expiration week has meant for the market and certain stocks.

Triple-Witching Expiration Week: The table below summarizes S&P 500 Index (SPX) weekly returns since 2010. Expiration weeks have been weak overall during this timeframe, but triple-witching expiration weeks have actually been quite bullish. Eight out of 10 have been positive, and these weeks average a return of almost 1%.

Also notable is the standard deviation of returns. It is often said that triple-witching expirations have the potential for increased volatility, due to the abundance of contracts expiring and the implications of many traders closing positions and opening new ones. However, the week of a triple-witching expiration has been less volatile than non-expiration weeks.

SPX Weekly Expiration-Week Returns Since 2010

Another reason for optimism heading into this week: September, specifically, has been quite bullish. Below I show the last 10 September expiration weeks. There's quite a streak going, with the last six of them being positive (five by more than 1%). Even including the very bad expiration-week loss of nearly 5% in 2002, September expiration week averages a 1.08% gain.

SPX September Expiration-Week Returns Since 2002

Individual Stocks and Triple Witching: Are there individual stocks that benefit from triple-witching expiration? I don't necessarily have a theory on why some stocks would outperform others during triple-witching expiration weeks, but I do have the numbers showing some stocks have, in fact, stood out from the pack. Below are the stocks that have the best average returns during triple-witching expiration week. Note the last column in the table shows the average return during other expiration weeks (non-triple witching). Interestingly, those returns are quite weak on a lot of the stocks on this list. Okay, maybe it's not that big of a surprise, given the market in general has been weak overall during this timeframe (see the first table in above).

Triple-Witching Expiration Returns by Stock Since 2010

This Week's Key Events: Housing and Manufacturing Data on Tap
Schaeffer's Editorial Staff

Here is a brief list of some key market events scheduled 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

  • The week kicks off with the Empire State manufacturing index. Meanwhile, LDK Solar (LDK) is due to report quarterly earnings.

Tuesday

  • Tuesday features the National Association of Home Builders (NAHB) housing market index. Meanwhile, investors will have the chance to mull over earnings results from FedEx (FDX).

Wednesday

  • Monthly housing starts, building permits, and existing home sales, as well as the regularly scheduled crude inventories report, will hit the Street on Wednesday. Companies stepping into the earnings confessional include Bed Bath & Beyond (BBBY), General Mills (GIS), AutoZone (AZO), Adobe Systems (ADBE), Cracker Barrel Old Country Store (CBRL), Apogee Enterprises (APOG), and Steelcase (SCS).

Thursday

  • Thursday's round-up will include weekly jobless claims, the Philadelphia Fed's manufacturing index, and the Conference Board's index of leading economic indicators. Wall Street can expect earnings reports from ConAgra Foods (CAG), Oracle (ORCL), Jefferies Group (JEF), Cintas (CTAS), Rite Aid (RAD), TIBCO Software (TIBX), and CarMax (KMX).

Friday

  • There are no major economic reports scheduled for Friday. KB Home (KBH) will wrap up the week's slate of quarterly earnings.

And now a few sectors of note...

Dissecting The Sectors
Sector
Leisure/Retail
Bullish

Outlook: Back-to-school shopping was a boon for U.S. retailers in August, as same-store sales rose by a stronger-than-forecast 6.1%. Meanwhile, retail spending rose a bigger-than-expected 0.9% in August, marking a second straight monthly increase. In the past year, retail sales have climbed a solid 4.7%. On the flip side, despite a larger-than-anticipated, gasoline-induced jump in August, consumer prices have risen just 1.7% over the past year -- a relatively low level of inflation that helped the Fed in its decision to launch QE3. Lately, we've observed a pattern of slight dips on poor macroeconomic news, and large advances on encouraging macro developments -- pointing to an appealing risk/reward set-up for the retail group. Against this backdrop, the SPDR S&P Retail ETF (XRT) continues to trade well above the $60 level, which is roughly quadruple the security's November 2008 low of $14.81. In fact, XRT hit a fresh all-time high of $65.47 last Friday, pushing past its previous year-to-date highs. Drilling down to specific equities, we like a number of names that have had positive reactions to earnings and/or same-store sales numbers, including Lululemon Athletica (LULU). Contrarian investors should continue to look for scenarios where outperforming retail stocks remain underappreciated by the crowd. Given recent data indicating overexposure on the part of hedge funds, however, we would suggest avoiding the "favored" stocks in this group that have suffered poor price action. One example of this phenomenon is Sears (SHLD), which is among the top 50 holdings at these prominent hedge funds, despite dropping more than 25% from its March peak.
Sector
Homebuilding
Bullish

Outlook: We continue to see evidence that the housing sector is in recovery mode. However, the fact that the Fed will target even more improvement in this sector (by buying mortgage-backed securities as part of QE3) is even more bullish for homebuilders. Turning to the charts, the SPDR S&P Homebuilders ETF (XHB) hit yet another new multi-year high on Friday. In fact, the ETF ended the week north of the key $25 level, which marked the 2008 peak ahead of a steep plunge from September-November 2008. Meanwhile, XHB's 20-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 1.41, as puts bought to open have outpaced calls during this time frame. We saw a similar pop in this ratio in February, when the ETF ultimately rallied for about three months before pulling back. This latest uptick could be the result of hedge funds using these puts to protect the long stock positions they've been accumulating. As we've noted recently, hedging is a bargain on this ETF of late, as implied volatility is at relatively low levels. As a result, individual investors who are long housing may also want to consider this approach to guard against possible short-term shocks. Some of our preferred names in the group include PulteGroup (PHM), D.R. Horton (DHI), Toll Brothers (TOL), Lennar (LEN), and Meritage Homes (MTH), due to a combination of solid price action and lingering skepticism from Wall Street. Going forward, all of these technically strong names could enjoy additional upside spurred by short-covering support or further analyst upgrades.
Sector
Gold
Bullish

Outlook: Thanks to the precious metal's status as a currency hedge, gold futures capitalized on the Fed's plans for another round of stimulus, which weighed on the U.S. dollar. In fact, December-dated gold muscled to a six-month peak last week, and the SPDR Gold Trust ETF (GLD) followed suit. The ETF is now trading well north of its 140-day and 320-day moving averages, as well as a long-term trendline joining a series of higher lows since 2009. Meanwhile, 20-day buy-to-open option volume continues to move higher from extreme lows on GLD -- which, historically, has had bullish implications, and signals that traders are jumping back into the yellow metal after a period of selling and/or disinterest. With global central banks still in easing mode, and fresh interest flowing into the gold-based ETF, it looks as though GLD's recent rally has legs.

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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