Why SPY Might Rally 5% Into Thanksgiving
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I happened to be looking at a 2012 option expiration calendar this morning and I noted there were 3 months this year in which the options on the CBOE Volatility Index (VIX) expired AFTER the general equity option expiration date (these VIX expiration dates -- in March, June and August -- are marked by an "X" on the accompanying SPY chart).While the sample size is probably too small to even call it a sample size, the SPY action in each of those 3 months was very similar, with SPY lows set early in the month followed by consistent gains into the VIX expiration date. The March closing low was on the 4th trading day, while the closing lows for June and August occurred on the 2nd trading day. The gains from these closing lows for each month to the VIX expiration dates were 4%, 7% and 4%, respectively, for an average gain of 5%.What perhaps makes this of non-trivial interest is this "late" VIX expiration occurs again this month, with VIX expiration scheduled for Wednesday, 11/21 while the final trading day for equity options is Friday, 11/16.I don't pretend to know if there might be some clear logic behind bullish market behavior in months with late VIX expirations, but I’d note that VIX option activity is so huge that its ebb and flow certainly influences S&P price action. "Delaying" the VIX expiration delays the monthly "reset" of VIX open interest (which has its greatest impact on reducing total VIX call open interest levels) relative to the monthly equity open interest reset, and this could somehow create some excess demand on the margin for equities during those periods.For a more quantitative case for an upcoming market rally based on historical VIX options data, I’d strongly suggest you review Todd Salamone’s comments in this week's Monday Morning Outlook.
Something else that stands out to me is the action after the VIX expiration, marked by the "x" in Bernie's chart. It appears the market tends to drift lower immediately after VIX expiration, and the headwind might be related to VIX call buyers replacing positions that expired. This would set up a rally into Thanksgiving, followed by a pullback in the week after expiration.
Turning to last year, we actually saw a big sell-off the second half of November. I remember doing various media appearances at the time and the consensus was we were headed for a worldwide recession. This of course was totally overblown and once the end of the world wasn't coming, it lead to a very strong first quarter in '12. As Bernie touched on above, the huge VIX call open interest could be yet another sign of simply too much worry and a repeat of higher prices once all of gloom and doom doesn't pan out.
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