Summary
Friday marks the third expiration of 2005, although the most important one so far, since it includes the major futures contracts. What are the implications if it is only as exciting as its two predecessors?
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Historically, expirations have skewed very heavily towards being times of mirth and reward for bulls. This surely was not the case in January. About the best you can say for last month's happening was that it was "lackluster," and taken on a net basis, the first two days of this week have been nothing to write home about.
Here is what my seven-measure tracking group looked like through yesterday's close, keying off respective 2004 closing highs.
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SELECTED STOCK-MARKET RETURNS
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03/15 2004
2005 High 03/15 Vs.
Close Close /Date 2004 High
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NYSE Comp. 7310 7254 12/30 +0.8%
DJIA 10745 10855 12/28 -1.0%
S&P 500 1198 1214 12/30 -1.3%
Wilsh. 5000 11817 11988 12/30 -1.4%
Value Line 394 405 12/30 -2.7%
Russ. 2000 627 655 12/28 -4.3%
NASDAQ 100 1502 1625 12/29 -7.6%
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Average -2.5%
Median -1.4%
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I wonder what three not-so-hot expirations in a row would indicate? That's a rhetorical question, of course, the response to which is, "nothing terribly good."
* My stock-market outlook for all of 2005 remains decidedly negative.
* So does my overall interest-rate outlook. Moreover, it could be the expiration of bond futures this week that already is causing problems for open-market interest rates, which, in turn is spilling over into the behavior of stocks and stock proxies.
* On the rate front, I believe the Federal Open Market Committee will raise its target rate on federal funds to 2.75% when the FOMC meets next week (on 3/22).
* As has been the case for many months now, the FOMC's post-meeting statement will be more important than the specific action taken on rates, since rate actions have been well advertised before the fact, and the markets have had ample opportunity to discount them.
* But life changes. Exorbitant energy prices have not been "transitory," as Greenspan predicted months ago. They are creating the worst of two worlds for policy makers. Despite the government's continuing desire and ability to hide the pressures in its bellwether inflation measures, rising energy costs are exacerbating inflation -- inflation that already was well on the up-tick. But energy prices are now taking a growing toll on economic growth.
* Which has led some in Wall Street's bullish quarters to opine that the Fed will halt raising its administered rates, perhaps as soon as next week. In other words, by taking a pass next week and leaving the funds rate at 2.50%.
* But if the Federal Reserve ignores the incremental price pressures created by rising energy prices by keeping short-term interest rates below the inflation rate, it is inviting worse trouble down the road. And remember, the inflation rate as portrayed by the current, highly bastardized Consumer Price Index is materially understated!
* A prominent danger associated with a higher Federal Funds Rate is the additional stress it brings to hedge-fund carry trades in Treasuries. I suspect that borrowing costs scaled off a 2.75% funds rate brings a larger and larger number of hedge funds at least to the brink of an unwinding process that becomes less and less discretionary regarding the timing decision.
* At present, my model equity portfolio holds cash and a short position in the S&P 500 established at 1,220. The short is about 10% of the account's value, which is roughly 25% of the total short position permitted under the account's investment guidelines. (The guidelines limit total shorts to 40% of the account's value).
* Coming into this week, it had been my goal to increase the short position to, say, double its current size, somewhere around S&P 1,210. This target was arrived at making the assumption that the LaSalle Street/Wall Street axis powers would attempt to gun and run stock prices for Friday's expiration. As I write this, the S&P 500 stands at roughly 1,190, so such an attempt isn't cutting it!
The danger inherent in all expirations under current market conditions is that if something goes wrong, it could really go wrong! I speak here far more about things getting carried away on the downside than in the other direction. Wednesdays tend to be important in the overall expiration cycle, so today's sizable weakness (DJ minus 86, S&P minus 7+) as this is being written might not be a good portent -- for bulls.
At any rate, although my guts tell me that an additional S&P short at 1,190ish might not work out all that badly by the time Friday rolls around, I'm simply going to sit with my current position.
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