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Historical Pattern For July’s Options Expiration Week at Trader’s Narrative

The following is a guest post by Charles H. Dow Award winner, Wayne Whaley (CTA) of Witter & Lester. If you would like to be privy to his daily market comments and model ratings via daily email, free of charge, email him at wayne[AT] with the subject title “ADD ME TO DAILY EMAIL”.

Wednesday’s (July 7th, 2010) advance was 3.1% on the S&P 500 Cash index. Today was a classic consolidation day, as we experienced modest profit taking overnight and mid morning from traders, before the underexposed portfolio managers came back in the afternoon to push the S&P back to positive.

I scanned my database for all days since 2000, where the S&P 500 was up between 2.5-3.5% and found 43 such days. The following day (Thursday, today) was positive 26 times, negative 17 times for an average gain of +0.19%, somewhat similar to today’s +0.94%.

But what does the third day (Friday) bring?

Looking specifically at the positive next day occurrences, their third day performance had a distinct bearish slant to it. Only 9 of the 26 were positive and the day averaged a loss of -0.23%. The last six (occurring between February 2009 and June 2010) have been negative. This could be considered even more bearish when put into context of the bull market in which these last six were distributed.

What does this tell us? That after a 3% move, the market owes the bears a one day pullback, if not on Thursday, then on Friday. But if the market manages to post its third consecutive positive day on Friday, in the face of such statistical headwinds, it would have to be viewed as a sign that this week’s market move has tenacity.

My daily model does a very similar generic S&P 500 momentum analysis to the above special study and that sp study is negative tomorrow as well. If I had no help from other sources, the bearish side would be a layup. But, inconveniently for the sake of decision making, the vast majority of the rest of my work is bullish.

Back to the Bullish Case
Over the last 30 years, the Friday before the July options expiration week (which 87% of the time is the second Friday in July) has been positive 22 times (73%). This is not easily explainable, but it is probably because it occurs on a Friday, right before earnings season in a five day period that is generally positive.

The Next Five Trading Days Seasonally
The S&P 500 went positive (+0.78%) today for the trailing 1 month. In years where the previous 21 trading days (1 month) were unchanged ( that is, +/- less than 1%), the following five trading days in July were 7-1 with an average return of +.91% and a median return of 1.54%.

I have respect for the first study that I showed you above, but net my models are positive.

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One Response to “Historical Pattern For July’s Options Expiration Week”  

  1. 1 PEJ

    Nice analysis.
    My concern is that I see no catalyst for a correction and that I feel over-bullishness around… Given that most Friday’s in this mega dead cat bounce of the lows in march 2009 were positive, I’m actually thinking we’ll have a continuation of the rally today.
    Wait&Pray :-)

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