Stock options expiration has been a source of volatility over the last year. Despite a record number of stock options expiring this Thursday, stocks drifted with little concern. As noted yesterday, over the past year, monthly stock options expirations have tended to usher in brief market declines.
Will it happen this week? We do not know, but we do know that the volume of November options is at record levels and that general liquidity is low. The recipe for volatility is in place, so trade with caution and keep an eye on your key risk levels.
What To Watch Today
- 8:30 a.m. ET: Retail sales advance, month-over-month, Oct. (1.5% expected, 0.7% in Sept.)
- 8:30 a.m. ET: Retail sales excluding auto and gas, month-over-month, Oct. (0.7% expected, 0.7% in Sept.)
- 8:30 a.m. ET: Import price index, month-over-month, Oct. (1.0% expected, 0.4% in Sept.)
- 8:30 a.m. ET: Export price index, month-over-month, Oct. (1.0% expected, 0.1% in Sept.)
- 9:15 a.m. ET: Industrial Production, month-over-month, Oct. (0.9% expected, -1.3% in Sept.)
- 9:15 a.m. ET: Capacity Utilization, Oct. (75.9% expected, 75.2% in Sept.)
- 10:00 a.m. ET: NAHB Housing Market Index, Nov. (80 expected, 80 in Oct.)
- 6:00 a.m. ET: Home Depot (HD) to report adjusted earnings of $3.39 on revenue of $34.91 billion
- 7:00 a.m. ET: Walmart (WMT) to report adjusted earnings of $1.40 on revenue of $135.69 billion
A Sea Of Liquidity
One of the main supports for the “bull market” over the last couple of years has been the surge in global liquidity. As shown by this chart courtesy of @isabelnet, while equity inflows are strong, bond inflows dwarf everything.
Lofty Expectations for Interest Rate Hikes
The graph below shows the implied Fed Funds rate based on Fed Funds futures pricing. The blue bars represent the expected dates at which a 100% chance of a rate increase will occur. For example, the market assigns a 100% chance of a rate increase by August 2022 and a 100% chance of a second increase by November 2022. As we show, the market expects the Fed to increase rates five times to 1.25% by the end of 2023.
A Shortage of Turkeys – RIA Pro PSA
There is definitely not a shortage of turkeys on Wall Street, but if you plan to serve turkey for Thanksgiving, you may want to buy one soon. As the graph shows, the volume of birds in storage is running at half the average rate.
Slumping Confidence and Political Ramifications
Last week we reported the University of Michigan Consumer Sentiment Survey fell more than expected and now sits at 10-year lows.
After digging deeper into the report, we discovered something interesting that will likely gain importance as we near next year’s mid-term elections. For starters, the divide in sentiment between Democrats and Republicans is massive at 90.8 and 53.1, respectively. Further, confidence among those considering themselves independents fell sharply to 69.2.
It is likely independents, along with moderate Democrats and Republicans, will decide the balance of power in the House and Senate. If independents’ confidence continues to fall, the Democrats are more likely to lose the House, Senate, or possibly both.
The Week Ahead
The economic calendar starts in earnest on Tuesday with Retail Sales and Industrial Production. Given the recent drop in consumer confidence, we would expect retail consumption to slump. However, retail sales do not account for inflation which will likely push the number higher. On Wednesday, we will see inflation which will likely print higher than estimates. After that, the rest of the week is relatively quiet.
We expect to see numerous Fed speakers this week. With the recent barrage of employment and inflation data, a few speakers may call on the Fed to increase the pace of tapering and move up the timeline for interest rate increases.
This week is also starting the winddown of earnings season as well, with only a few notable companies reporting.
Options expiration is on Thursday. As David Robertson points out below, options market volume has been extreme. Such high volumes, open interest, and generally low stock volume can lead to significant price swings.
Retail is extremely active, and they love punting options. Below are a few stunning facts via Goldman’s Scott Rubner:
- 1. single stock option notional (140%) now exceeds single stock shares notional
- 2. over 70% of options traded have an expiry of two weeks or less (more in the 2,3,4 day range)
- 3. $904bn (Thursday stock option notional). This is largest single stock option notional traded of all time.
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