S&P 500: 1,340.35 Change: -0.84%

MackTheKnife

P&P Score: 99.12 Points: 103.40 Accuracy: 73.48% Average Pick Score: 1.44 Annual Return: 14.17% (55.84% since 3/6/08)

MackTheKnife's Blog : OpEx Week and SPX: Aug 2007-Jul 2009

August 16, 2009 Edited: August 16, 2009

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Two years ago this month, the onset of a global credit crisis of historic proportions became clear even to the most obscurant of financial-market observers. For example, the Federal Open Market Committee issued not one but two unscheduled monetary-policy statements during that fateful month: the first on Aug 10 (http://tinyurl.com/l3lwj3) and the second on Aug 17 (http://tinyurl.com/ywvp5w).

With this sea change in credit conditions in mind, we here at the home office of the completely fictional Druids Investment Group (Can You DIG It?) recently assembled data centered on the behavior of the Standard & Poor's (S&P) 500 (SPX) during each of the 24 options-expiration (OpEx) trading weeks between Aug 2007 and Jul 2009 (i.e., trading weeks like the one starting tomorrow).

Because of the diminutive sample size, I do not consider my OpEx week figures statistically significant. However, I nonetheless find the following numbers interesting, especially in comparison with those appearing in the excellent Options Expiration Week = Stock Market Strength (http://tinyurl.com/4uga3w) post composed by Michael Stokes at the MarketSci Blog (http://tinyurl.com/ne8e8w):

S&P 500 Gains and Losses by Percentage
During OpEx Weeks From Aug 2007 to Jul 2009

Source: Druids Investment Group (DIG) Table Based on Yahoo! Finance Data

On the one hand, I believe both the comparatively long-term MarketSci data set and the relatively short-term DIG data set agree there is an intermediate probability, with an upward bias, that SPX will post a positive return during the coming OpEx week. (MarketSci: 60.96% of its OpEx weeks were positive and 39.04% of them were negative. DIG: 62.50% of its OpEx weeks were positive and 37.50% of them were negative.)

On the other hand, I think the two data sets disagree with respect to the historical mean one-week returns during OpEx weeks in their respective study periods, which indicates that on average SPX's recent gains have been lower and its recent losses have been higher over OpEx weeks than is usually the case. (MarketSci: The mean return was 0.46%. DIG: The mean return was -0.28%.)

The Bottom Line: Because of the recency bias built into my work, the comparison of the two above-referenced data sets has led me to temper my customary bullishness related to OpEx week this time around . . .

Tags : SPX FEDERAL OPEN MARKET COMMITTEE OPTIONS EXPIRATION

12 Comment(s):

TickerBandit Date

August 16, 2009 07:41 Abuse this post

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Keep'em coming Mack, another interesting post, thanks.

MackTheKnife Date

August 16, 2009 08:28 Abuse this post

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Howdy, TB!

Keep'em coming Mack, another interesting post, thanks.

Thanks for the kind words!

At this moment, I am planning a blog post to be published at some point after the latest data on the S&P/Case-Shiller Home Price Indices are released Aug 25. Basically, it will not only bring up-to-date my Alternative U.S. Realty Realities series -- originally pushed live in February -- but also contend Mr. Market completely misread the S&P/Case-Shiller data that were released Jul 28 (i.e., my thesis is the hike in U.S. home prices during the second quarter of this year was a one- or two-month blip primarily caused by a single predictable factor, which means I suspect they either have resumed or will soon resume moving lower).

Good luck!

MackTheKnife

TickerBandit Date

August 16, 2009 08:38 Abuse this post

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I think you are correct about Case-Shiller, but I am unsure about whether it happens in the August report. If it does, then September swoon becomes a tangible concern for sure. I was hoping to see DMM below $15 ...

I'm looking forward to your next post that series.

MackTheKnife Date

August 16, 2009 09:03 Abuse this post

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Howdy, TB!

I think you are correct about Case-Shiller, but I am unsure about whether it happens in the August report.

Well, it is about 50-50 whether the pivotal report comes Aug 25 or Sep 29, but my interpretation of other housing data series leads my best guesstimate to be the former. Could go either way, though.

If it does, then September swoon becomes a tangible concern for sure.

Oh, yeah.

I was hoping to see DMM below $15

I have great respect for Robert Shiller as an economist, but I am pretty unimpressed with his ability as a creator of investing and trading vehicles (i.e., I would be completely unsurprised should UMM and DMM both move below $15.00 -- or even $1.50 -- per share at some point in the future, which would be an amazing feat given the comparative historical lack of volatility in real estate).

UCR
Beloved Sibling of DCR
Multiple Birth-and-Death Dates

DCR
Beloved Sibling of UCR
Multiple Birth-and-Death Dates

Good luck!

MackTheKnife

TickerBandit Date

August 16, 2009 09:39 Abuse this post

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Mack,

You should investigate DMM/UMM more. These vehicles eliminate some of the more disdainful problems of other leveraged funds in the following ways.

1. They do not attempt to achieve daily 3x by taking risks in the marketplace.

2. Their assets are in Treasuries and they exchange them monthly when the Case Shiller numbers are announced.

3. Because they are not taking increased risks at higher prices and reduced risks at lower prices, They do not have the problems of say a FAZ which persistently buys high and sells low leading to declines over time even when the prices over that period have moved favorably.

This is because the point from which the gains/loss are calculated are the "initial" number (as opposed to yesterday). So there isn't that constant stealing of real value to the market. The total of the two funds net asset value remains constant less the fees for management. I really wish Macro Shares would do this on stock indices for re-balance weekly.

All that said, given sufficient movement one of the Macro-Shares vehicles could lose all of its net asset value to the other. I'm not recommending them to anyone but I do think I myself might purchase DMM when I feel it appropriate. In any event, if one the funds loses all of its value to the other, it will be because of a genuine adverse price movement and not (buy high/sell low) trading by the managers.

MackTheKnife Date

August 16, 2009 13:36 Abuse this post

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Howdy, TB!

You should investigate DMM/UMM more.

If Robert Shiller wants to sell me a book chock full of his latest analyses of the U.S. economy and financial markets, then I will keep my mind open and walk -- I mean, run -- to my friendly neighborhood Barnes & Noble for a copy.

If Robert Shiller wants to sell me an exchange-traded security, then I will keep my wallet closed and walk -- I mean, run -- in the other direction, any other direction.

Disasters of the UCR/DCR kind tend to become frozen in memory . . .

Good luck!

MackTheKnife

TickerBandit Date

August 16, 2009 13:52 Edited: August 16, 2009 by TickerBandit Abuse this post

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Crude oil is too volatile for a 3x ETP, 33% wipes one side out, but even so, they operated just like they were supposed to and unlike the Proshares, one side was the correct side to be on, as opposed to BOTH sides being wrong.

That's the thing about Proshares, one can be correct and still lose money because volatility steals value. If one can't win when he is correct, when can he win? Proshares are far worse IMHO.

MackTheKnife Date

August 16, 2009 14:02 Abuse this post

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Howdy, TB!

they operated just like they were supposed to

If UCR and DCR operated just like they were supposed to, then why are they unavailable in the marketplace?

Good luck!

MackTheKnife

TickerBandit Date

August 16, 2009 22:38 Abuse this post

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That's not a legitimate question. They worked like they were supposed to work, that is why they are not available. When one of the pair consumes the NAV of the the other, then everything is closed out. A 33% move does that. That's how they are supposed to work.

Personally, I would like to see Macro-shares do a 2x for stock indexes. Would be a far better deal than the SSO, SRS, and SDS which are in your P&P portfolio. I don't expect you understand why they are fairer to the participants, you just don't get it and probably never will :-).

MackTheKnife Date

August 17, 2009 03:26 Abuse this post

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Howdy, TB!

That's not a legitimate question.

In investing and trading -- as in life -- every question is legitimate.

you just don't get it and probably never will

Exactly.

Good luck!

MackTheKnife

DALC

August 17, 2009 10:57 Abuse this post

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Hi MackTheKnife,

Your interesting 24 months of data bring two thoughts to mind:

1. I will never watch '24' the same way again. (Since I've never watched '24,' my resolution may prove difficult to put into effect....)

2. Given that your data chart is red, green, and blue, and the U.S. flag is red, white, and blue, I can only conclude that you are more of an environmentalist than most of the people who watch '24.'

MackTheKnife Date

August 17, 2009 11:23 Abuse this post

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Howdy, DALC!

I will never watch '24' the same way again. (Since I've never watched '24,' my resolution may prove difficult to put into effect....)

If 24 hits 25, then I say, "Sell!"

Given that your data chart is red, green, and blue, and the U.S. flag is red, white, and blue, I can only conclude that you are more of an environmentalist than most of the people who watch '24.'

Either that or I was feeling blue about too little in the way of green shoots in the economy lately and too much in the way of red ink in my portfolio last week.

Good luck!

MackTheKnife

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