Seasonal Cycles and Options Expiration Week

Jason Goepfert from SentimenTrader shared the following seasonal pattern via twitter Friday… when S&P futures have gained 0.5% on the last three days of a week, the first day of the following week has been down 74% of the time, averaging a loss of 0.7%. Here’s a look at every occurrence since 1990…

S&P Futures +0.5% Last Three Days of Week
07/09/10… S&P futures ??? next session
12/11/09… S&P futures +0.5% next session
08/21/09… S&P futures -0.1% next session
04/17/09… S&P futures -3.9% next session
04/03/09… S&P futures -1.2% next session
03/13/09… S&P futures -0.1% next session
01/02/09… S&P futures +0.2% next session
11/28/08… S&P futures -8.9%| next session
09/12/08… S&P futures -5.0% next session
07/18/08… S&P futures +0.1% next session
06/15/07… S&P futures -0.1% next session
05/26/06… S&P futures -1.8% next session
02/25/05… S&P futures -0.7% next session
11/05/04… S&P futures -0.1% next session
04/27/01… S&P futures -0.3% next session
03/24/00… S&P futures -1.1% next session
03/17/00… S&P futures -0.7% next session
12/03/99… S&P futures -0.9% next session
11/12/99… S&P futures +0.1% next session
11/05/99… S&P futures -0.1% next session
10/29/99… S&P futures -1.0% next session
07/02/99… S&P futures -0.2% next session
11/20/98… S&P futures +2.3% next session (*)
11/06/98… S&P futures -1.0% next session
05/01/98… S&P futures -0.2% next session
11/21/97… S&P futures -2.0% next session
10/03/97… S&P futures +0.6% next session
07/03/97… S&P futures -1.0% next session
08/02/96… S&P futures -0.7% next session
01/18/91… S&P futures -0.3% next session

Out of 29 occurrences since 1990, the S&P closed lower the next day 23 times, or 79% of the time. That’s a significant downside edge compared with the 47% random chance for a lower S&P close one day later in the same time frame. In only one case did the S&P gain over 0.6% the next day, while it fell over 0.6% fourteen times.

This seasonal pattern is in agreement with short-term negative indications based on Thursday’s oversold volatility and Friday’s sharp dropoff in volume. Not only did SPY volume hit a two-month low, but NYSE volume fell to its lowest level of the year. When unusually low NYSE volume coincides with a 2:1+ positive breadth session, it usually leads to a short-term pullback (see this June 13th column for a recent track record). I’d also note that Friday was a financials-led rally, with the BKX more than tripling the gain of the SPX. This pattern has also typically preceded a short-term pullback in recent years (see this column from last October for details).

While the seasonal pattern based on three consecutive 0.5% gains for the SPX in the Wednesday-Friday time frame has bearish implications for Monday, the late-week gains also preceded this week’s options expiration. Interestingly, when the market moves steadily higher in the three days prior to options expiration week, the S&P has a strong track record of continuing to push higher over the next 2-4 sessions. Here’s a look at each of the last 30 instances in which the S&P closed higher three consecutive days prior to options expiration week…

S&P Closes Higher Three Consecutive Days Heading into OpEx Week
07/09/10… S&P ??? three sessions later
01/08/10… S&P +0.1% three sessions later
12/11/09… S&P +0.1% two sessions later
10/09/09… S&P +0.2% two sessions later
03/13/09… S&P +2.9% two sessions later
09/12/08… S&P  +0.3% five sessions later
09/14/07… S&P +2.4% two sessions later
07/13/07… S&P +0.0% four sessions later
11/11/05… S&P +0.7% four sessions later
08/08/03… S&P +1.3% two sessions later
03/14/03… S&P +4.0% two sessions later
08/09/02… S&P +1.2% three sessions later
07/14/00… S&P +0.0% one session later
11/12/99… S&P +1.7% two sessions later
04/09/99… S&P +0.1% two sessions later
06/13/97… S&P +0.1% two sessions later
11/08/96… S&P +0.0% three sessions later
09/13/96… S&P +0.4% two sessions later
05/10/96… S&P +2.1% two sessions later
02/09/96… S&P +0.6% two sessions later
10/13/95… S&P +0.4% two sessions later
09/08/95… S&P +0.7% two sessions later
05/12/95… S&P +0.5% two sessions later
03/10/95… S&P +0.7% two sessions later
07/10/92… S&P +0.7% two sessions later
07/13/90… S&P +0.1% two sessions later
05/11/90… S&P +0.7% two sessions later
07/14/89… S&P +1.2% three sessions later
05/12/89… S&P +0.5% two sessions later
01/13/89… S&P +0.9% three sessions later
09/09/88… S&P +0.2% two sessions later

Two noteworthy points from the table above… the S&P closed higher (above the setup day’s close) at some point during expiration week 100% of the time. And the S&P closed higher 2-4 days later in 28 out of the last 30 occurrences, or 93% of the time, significantly above the 70% random chance for a higher S&P 2-4 sessions later in the same time frame. This tells us that while seasonal cycles favor a down day Monday, they favor higher prices (above Friday’s close) in the Tuesday-Thursday time frame.

Categories : Archived EOD Commentary, End-of-Day Commentary

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