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Quadruple witching, zero excitement

Fri, Sep 18 2009, 20:32 GMT
by Carley Garner

DeCarley Trading  |  View company's profile

I found it ironic that the Associated Press ran a story on today's stock trade with the headline, "Stocks Rise in Volatile Quadruple Witching Trade". The September futures expired this morning on a high note, the rest of the session saw consolidation trade. Looking at volume data and based on communications from the trading floor, most traders simply took the rest of the day off (or perhaps they never showed up in the first place). At one point during the day it was noted that the S&P open outcry pit only had 25 locals standing in it. On a good day, it may have 130 to 150.

Monday's trade is key in that it may be the deciding factor in whether or not this rally can continue from current levels or if some corrective trade is needed. It could be that option (and futures) expiration artificially held the indices up. This can sometimes be the case if there are a lot of option traders caught on the wrong side of a market. For instance, short call traders may look to buy futures against their short call options and in turn force the market higher against their original positions. There is always a chance that expiration actually kept a cap on the rally, but I don't feel that this is the case.

According to Marc Harris, co-head of global research for RBC Capital Markets in New York, the strength of the rally has been a surprise to investors due to the fact that much of the gains are coming from "lower-quality" with "weak balance sheets". He added, "Even turkeys are going to fly in a hurricane," and noted, "Those lower-quality companies are leading the charge here."
Some friends of ours from the CME floor came up with a list of "15 not so good things for the stock market", and I thought that you might be interested.

1. The S&P 500 closed more than 20% above its 200-day moving average yesterday for the first time since May 1983.

2. On a risk adjusted return basis between 1990-2009 for Global Equities vs. USD and 30-yr UST, the standard deviation is historically+/- 2. Currently, this measurement is at an extreme showing 4 standard deviations arguing equities are rich and you should allocate to long UST and USD.

3. For the first time since the recovery off the March lows, high yield credit spreads fell below their "pre-Lehman" levels.
4. The national municipal bond ETF (MUB US) is trading at an all-time high today. The trading in muni's runs counter to the concerns people have about local and state governments. Since most muni's offer tax-free income, the run-up could also be due to worries about the coming increase in taxes.

5. Airlines (XAL Index) are up 12 days in a row..."stop the fraud"
6. T-Bills are yielding 9 bps down from 20 bps recently.

7. Volker says banks should operate in a less risky fashion and no prop trading. Krugman says unemployment in the US will peak in 2011 because of slow recovery. World Bank said the recovery in Emerging Markets is likely to be weak.

8. US Continuing Jobless Claims (INJCSP Index) ticked back up on the weekly chart signaling a more mixed/choppy recovery.

9. DJ Industrials and Utilities Indices made new highs yesterday as did SPX but the Transport Index was negative. This is a Dow Theory bearish divergence.

10. Ikea, the world's biggest home-furnishings retailer, reported its slowest annual sales growth in more than a decade and called 2009 a "challenging" year as consumers cut back on purchases.

11. Zhou Wenzhong, China's ambassador to the U.S. said he "wants to believe" President Barack Obama's decision to impose tariffs on imports of Chinese tires won't start a trade war. "The worst thing would be if this becomes a precedent,"

12. Financials - After the standing room only Barclays conference (read crowded long sector), KBW Inc., the New York-based boutique that advises financial institutions, expects 500 to 1,000 U.S. banks to fail by 2011, Chief Executive Officer John Duffy said.

13. Small Caps - The only thing more volatile than Chinese Small Caps are Chinese NASDAQ Small Caps. The China Securities Regulatory Commission will allow initial public offerings by seven companies in the first batch of sales on the nation's Nasdaq-like board for start-ups.

14. RIMM - Bluefin says US carriers did not see the expected pick-up in sales for back to school season. Aug worst month of yr for carriers, didn't see big back to school pickup that expected. Jul/Aug sell-in below sell-thru.

15. Asia - Sinopharm's IPO drew about $114 billion of orders as Hong Kong investors sought almost 600 times the amount of stock available to them.


* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already be factored into current prices, any references to such does not indicate future market action.

Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.


S&P 500 Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading

Position Trade -

September 10 - Our clients were recommended to sell calls into the rally, most sold the 1095 or 1090 strikes in the October S&P options for $6.50 to $6.00 respectively.


Russell Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading


Position Trade -

Flat

Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.


NASDAQ Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading

Position Trade -

September 10 - Sell 1 mini NASDAQ at 1683ish

Published on  Fri, Sep 18 2009, 20:43 GMT