Market pullback ahead ? A look at the US markets at the April options expiry date
The markets on April 16th, 2010 were quite volatile and clearly in pullback mode. Both the S&P/TSX, S&P 500 along with the Nasdaq we down more than 1%. The impressive Venture exchange was only down .75% despite Gold closing 1.91% lower to 1137.3 USD. The catalyst of this drop seems to be, in part, some disconcerting news about fraud charges against Goldman Sachs as well as some recent earnings numbers. The question on investors’ minds is whether the Spring rally which has been impressive this year will yield to a significant pullback not unlike the one we saw in January. Some even are suggesting an end to the move from the March 9th, 2009 bottom into current levels.
Against this less than optimistic backdrop, we take a look at the S&P 500 and observe that today is also an options expiry date (OED – the third Friday of the month). This is one of two dates that merit some level of study based on anecdotal observations (see chart below). The other date is the end of the month when some mutual funds and many hedge funds have to report on their monthly performance.
S&P 500 chart showing the option expiry dates Sep. 2009 to April 2010 (courtesy or stockcharts.com)
In this chart of the S&P500, we examine the eight most recent options expiry dates since September 2009. Overall, there is always some volatility around these dates. Three pullbacks around the dates for last September, October and January can be identified (what happens beyond April’s OED remains to be seen). The main observation here is that all significant pullbacks have started around or gravitated towards these dates. The reader can also choose to observe what happened around the end of each of the same months.
Naturally, this is just an observation using a small number of such occurances. More study should be done to understand the influence of the dramatic proliferation in options trading and growth in hedge funds on the short term behaviour of the markets.
That said, the market has been up smartly since an important low in February. Prices are extended and some kind of a pullback for profit taking and a period of consolidation is in order. It is true that April is a strong month from a seasonality standpoint. However, during 2010, many events such as the January/February high and February/March low ahead of the Spring rally have come earlier in the year than they would have ideally have. This is in comparison to history which shows both January and April as likely to be some of the better performing months during a calendar year.
In this note, we examine the possible influence of OEDs on the timing of short term market pullbacks. Will this April date be the catalyst for some kind of pullback? Time will tell.
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