If the S&P 500 fails to close this week’s trading above last Friday’s close, history-conscious investors might feel a sinking sense of deja vu.
As Neil Azous of advisory firm Rareview Macro pointed out in a Monday morning note, the S&P made its closing weekly high for 2015 on July 17. And while stocks managed to climb higher in the following session, the index didn’t have a higher weekly close until two Fridays ago.
The potential similarities between then and now don’t just come down to the weather outside. July 17, like July 15, marked July options expiration; in other words, the prices at which stocks and indexes closed that day determined the profit or loss made on relevant derivatives contracts.
For Azous, this is no mere coincidence. He reports that “there was an extraordinarily large amount of short call options outstanding for last Friday’s expiration, which created an unnatural demand for equities.” In other words, into the expiration event, traders purchased long positions on the S&P so as to hedge their outstanding (inverse) exposure to the market through short call options.
This might go some way toward explaining the dramatic move higher last week, which occurred on little in the way of bullish news.
And if Azous is correct that “unnatural” conditions played a large role in the climb, it means that even more will have to go right for the market in order for stocks to continue climbing.
Otherwise, a rerun of last year’s weekly trading pattern may be in store.