Introduction
The long history of options expirations is that almost by magic, they breath upside life into stock prices. Once in a rare while, however, something goes wrong and leads to all hell breaking loose in the other direction. Does the approaching August 2004 expiration possess that potential?
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Last Thursday, all seven components in my stock-market tracking group closed at 2004 lows, several by the slimmest of margins. Here's what the group looked like going into last Friday's trading session.
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GILLESPIE STOCK-MARKET TRACKING GROUP
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Prior Low Close
08/12 ----------------
Close Value Date Change
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DJIA 9814.59 9815.33 08/06 -0.01%
S&P 500 1063.23 1063.97 08/06 -0.07%
NYSE Comp. 6217.06 6225.83 08/06 -0.14%
Wil. 5000 10293.53 10307.80 08/06 -0.14%
Russ. 2000 517.10 518.33 08/09 -0.24%
Value Line 333.06 335.02 08/09 -0.59%
NASDAQ 100 1304.43 1315.30 08/06 -0.83%
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Average -0.29%
Median -0.14%
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Therefore, Friday's session represented another critical moment for the bullish camp, most of which continues to maintain that the market's recent slide is nothing more than a "correction."
The bulls held the line on Friday, as the market avoided a further decline to new lows, either decisive or marginal ones. But the tracking group also failed to distance itself very far from respective closing prices on Thursday. For Friday alone, the group was up an average 0.14%. For all of last week, it fell an average 0.21%. Returns for the week ran in a range of +0.14% for the NYSE Composite, to minus 0.73% for the Value Line Index (geometric.)
(I hate carrying these numbers to two decimal places. I promise to cease doing so as soon as the market makes it unnecessary.)
I am still looking for additional declines of a serious nature during the market's current down-leg. Using two of the three bellwethers I employ for the purpose of monitoring moving-average relationships, something 5% to 10% below last Friday's 200-day moving-average values does not appear an unreasonable place to start. As the following table indicates this would be for the DJIA and the S&P 500, since the NASDAQ Composite would have had to close about 23 points higher than it did merely to stand 10% below its current 200-day measure.
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200-DAY MOVING-AVERAGE VIOLATIONS --
VALUES PROJECTED FROM CLOSE ON 08/13/04
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% Decl/Gain From
MA Violation/ 08/13 Close At
Resulting Price Violation Of:
08/13 --------------- ----------------
Measure Close 0% 5% 10% 0% 5% 10%
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DJIA 9825 10260 9747 9234 +4.4 -0.8 -6.0
NAZ Comp. 1757 1978 1879 1780 +12.5 +6.9 +1.3
S&P 500 1065 1112 1056 1001 +4.4 -0.8 -6.0
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(See Table 1 at the end of the text for a longer-term perspective on 20-day, 50-day and 200-day moving averages.)
The coming week contains an options expiration. Based on historical experience, these events far more frequently help markets than hurt them, at least during the period the expiration is exerting its influence. However, exceptions do occur, and the July 2002 episode comes very vividly to mind. It had a lot to do with putting stocks into the spin that month that finally led to the washout bottom occurring immediately after the July 2002 expiration.
I'm not making a firm prediction that history is about to repeat, but there are some interesting possibilities, as shown in the following table. I've only had a close look at the following index options, but I suspect there may be some large equity-option positions of similar interest.
Expiring August Index Options
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Open Interest
Strike --------------- 08/13
Price Calls Puts Close
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S&P 500 (SPX)= 1064.80
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1050 5216 31935
1055 330 4414
1060 1964 10703
1065* 1759 7833
1070 3172 9849
1075 11642 30849
1080 11418 13647
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Total 35501 109230
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DJIA (DIA)= 98.70
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97.00 1594 4272
98.00 2463 5243
99.00* 3729 6775
100.00 6645 8046
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Total 14431 24336
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NASDAQ 100 (QQQ)= 32.52
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32.00 41554 93909
33.00* 114401 173978
34.00 141529 199975
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Total 297484 467862
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*In/close to in the money level.
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The first thing catching the eye is the large skew in open interest between calls and puts, favoring the put side of the ledger for the contracts shown. The next thing of interest is how many puts would either go in or out of the money with the change of a mere strike price or two, depending on the underlying index.
So the mission at hand for the folks having to pay off on these puts is to try to "help" them get out of the money and expire worthless. On the other hand, were something to go wrong early in the coming trading week that dropped prices sharply, thereby having a large volume of additional puts go into the money, the attempted hedging of the liability could get the market rocking and rolling even more on the downside.
Remember, too, that because of the persistently low VIX over the last several months, many/most of these contracts were written for low premiums.
I believe we are going to have an exciting week, one that possesses the potential for helping create the genuine selling climax I'm look for and have been writing about recently.
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Table 1.
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DJIA, NASDAQ COMPOSITE AND S&P 500 CLOSING
PRICES ON SELECTED DATES VERSUS RESPECTIVE
20-DAY, 50-DAY AND 200-DAY MOVING AVERAGES
(In Percent or Portion Thereof)
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DJIA Vs. NAZ Comp. Vs. S&P 500 Vs.
------------- ------------- -------------
Date 20D 50D 200D 20D 50D 200D 20D 50D 200D
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2004
08/13 -2 -4 -4 -5 -9 -11 -2 -4 -4
07/16 -2 -<1 -<1 -5 -4 -5 -2 -2 -<1
06/11 3 1 3 2 1 1 2 1 4
05/14 -2 -3 -<1 -3 -4 -3 -2 -2 1
04/16 1 <1 5 -<1 -<1 4 <1 <1 6
03/12 -3 -3 5 -2 -4 5 -2 -2 6
02/13 <1 2 11 -1 <1 12 <1 3 11
01/16 1 5 13 5 8 20 2 5 13
01/02 2 5 12 1 2 14 2 4 10
2003
=================================================
03/14 <1 -3 -7 2 -<1 -0.7 <1 -3 -7
=================================================
2002
10/09 -7 -13 -23 -7 -12 -30 -7 -12 -24
=================================================
07/16 NA -12 -14 NA -11 -22 NA -12 -18
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Table 2.
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THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 10/09/02 THROUGH 08/13/04
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S&P 500
Date CBOE Options -------------------
or Put/Call Ratios Vs. Cum.
Week CBOE -------------------- Prior 5/12/04
Ended VIX* All Equ. Ind. Tot** Close Week = 100
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2004
08/13 17.98 1.02 0.75 1.73 0.84 1064.8 +0.1% 97.37
08/06 19.34 1.38 1.28 1.65 0.85 1064.0 -3.4% 97.29
07/30 15.32 0.63 0.53 1.21 0.86 1101.7 +1.4% 100.74
07/23 16.50 0.81 0.63 1.75 0.87 1086.2 -1.4% 99.32
07/16 14.34 1.12 0.93 1.92 0.84 1101.4 -1.0% 100.71
07/09 15.78 0.75 0.67 0.98 0.85 1112.8 -1.1% 101.76
07/02 15.08 0.81 0.71 1.27 0.85 1125.4 -0.8% 102.91
06/25 15.19 0.68 0.57 1.24 0.85 1134.4 -0.1% 103.73
06/18 14.99 0.80 0.60 1.78 0.86 1135.0 -0.1% 103.79
06/11 15.04 1.15 1.01 1.58 0.86 1136.5 +1.2% 103.92
06/04 16.78 1.02 0.83 1.58 0.86 1122.5 +0.2% 102.64
05/28 15.50 1.05 0.70 2.83 0.85 1120.7 +2.5% 102.48
05/21 18.49 1.12 0.81 2.12 0.84 1093.6 ---> = 100.00
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VIX Highs and Lows (Including Intraday)
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Year High Date Low Date
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2004* 22.67 03/22 13.34 07/14
2003 41.16 03/12 14.83 12/15
2002 56.74 07/24 18.87 03/28
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*2004 = values for revised VIX series.
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Table 3.
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DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
-- 13 WEEKS ENDED 08/13/04
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Week S&P NASDAQ
Ended DJIA 500 100
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2004
08/13 -56% -59% -83%
08/06 -32% -42% -69%
07/30 -0% +1% +17%
07/23 -48% -47% -37%
07/16 -31% -43% -80%
07/09 -33% -39% -64%
07/02 -29% -20% +34%
06/25 -9% -5% +35%
06/18 +7% +5% +3%
06/11 +75% +44% +30%
06/04 +103% +97% +134%
05/28 +57% +80% +233%
05/21 -32% -11% +4%
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DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
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PROJECTED VALUES TO 08/20/04 FROM 08/13/04 CLOSE
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Projections to 08/20/04
From ------------------------------------------
08/13 2-Wk. S&P 2-Wk. NASD 2-Wk.
Close DJIA ROC 500 ROC 100 ROC
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+5% 10317 +265% 1118 +263% 1373 +205%
+3% 10120 +121% 1097 +121% 1347 +86%
0% 9825 +3% 1065 +3% 1308 -13%
-3% 9531 -53% 1033 -54% 1269 -61%
-5% 9334 -73% 1012 -73% 1242 -77%
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