This free page is dedicated to a long time PUG SMA subscriber (Denali92) who has compiled and analyzed a large amount of good historical data on market turning points as it relates to FOMC (Federal Open Market Committee), Monthly Option Expiration (OPEX), Monthly Non-Farm Payroll (NFP) and Holidays.

Opex Tuesday (16-Mar-21)   March 2021 opex – thoughts on recent history vs normal opex history

The latest phase of this persistent bull market continues to impress.  At 137 days, it is now at the median length for the 21 persistent rallies that have occurred since 1998.   The longest is the 277 day rally that occurred after the November 2016 election (until August 2017).     (note: Persistent rallies are defined as extended rallies greater than 2 months with no touches of the 20 week MA from above)

• One interesting point to note is that it is the first time since that 2017 persistent rally that the SPX has traded below its lower daily bollo and then gone on to make new highs before trading at the 20 week MA. 
• None of the 5 other persistent rallies since August 2017 had ever traded below the lower bollo and then rebounded to new highs.
• In fact, only 38% of the 21 persistent rallies since 1998 have seen the SPX trade below the lower daily bollo and then rebound to trade at new highs before trading at or below the 20 week MA
• In August 2017, the SPX traded at its 20 week MA about 6 weeks after it last touched the lower daily bollo.

Lastly, as I highlighted last month, other than the April 2010 and January 2018 tops, all of the persistent market rallies have ended either early in the month or during the opex period.

The most important point to highlight is that no matter what happens with this March opex period, there is a low likelihood that this market will see its high for the year in March, as the high in March 2000 is the only time the SPX has had its annual high for the year in March since 1948. Yes, just once in 73 years.

Opex periods have produced a lot of 3% or more turns since Jan 2020

Since January 2020, Opex has generated the most turns of 3% or more since the October 2007 – March 2009 period. Every single opex period – EXCEPT for August 2020 (rally continuation) has generated a turn (top or bottom) of more than 3% highlighted by last March’s MEGA Monday post opex bottom.

Given the market continues to follow recent history much more consistently than prior history since 1998 (just see the failure of most bearish leaning stats for confirmation) one must assume that this 3% turn trend will continue. If so, what is notable and quite unusual for Opex, is that other than December 2020, the opex period has seen many more early opex week extremes than is normal.  Since January 2020’s fairly normal opex period, there have been 9 (out of 14) opex week periods with extremes on the first or second trading day of opex week – that is far more than normal as the first two days of opex week are generally the least likely to have an opex period extreme.   (See below for the info on the last 14 opex periods)

March opex periods – tops, but only one significant one

Between MARCH 2012 and March 2019,  the March opex period was all about Tops – only one of which was an extreme top (March 2018 – 8.1% Opex Tuesday top) All of the others were reasonably limited pullbacks of between 1.4% and 3.3% – none of which lasted in to April.

• There was NO consistency as to when these tops occurred as they occurred between Opex Tuesday (2018) and the Tuesday post opex (2019)
• For QUAD opex months, Opex Friday is the most likely day for a top (like in Dec 2020).
• Just over 60% of QUAD opex weeks have had turns of over 3% since 1998.

(note: Between March 2007 and March 2011, it was all about major bottoms for the March opex period. Prior to 2007, March opex had a wide variety of outcomes)

Bottom line:

With the SPX’s rally and new all time highs on Opex Tuesday, this is an opex period that could still produce many different outcomes:

• RECENT history: Would suggest caution as a top and greater than 3% pullback could occur shortly – (possibly even on Opex Tuesday) quite likely setting up an opex period bottom (or certainly a strong bounce like post Feb opex) at the end of this week or early next week. (This is what has been occurring recently)
• March opex history (between 2012 and 2019) would suggest a top will occur, but it could occur any time between opex Tuesday and the Wednesday post opex and it will not be all that significant a top as there was just 1 out of 8 tops between March 2012 and March 2019 that was greater than a 3.3% pullback.
• An Opex Period Bottom – later in the Opex period like in May, November and December 2020 and January 2021 is also an outcome that needs to be considered as most Fed triggered QUAD Opex period corrections do not last that long, especially in March.
• A Rally continuation where there is no discernible pullback (like in August 2020) is also a possibility – though not likely as rally continuations have only occurred during 4% of Quad opex weeks since 1998. The last one was in December 2019.

In the end, it is more than likely that tomorrow’s FOMC decision and Powell’s press conference will determine the outcome for this March opex period.    

During persistent market periods, I do not like suggesting the possibility of a top as that is generally a fool’s errand given the strength and durability of persistent market rallies, but as a market historian, it is important to make everyone aware of just how consistent the market has been recently in having greater than 3% turns during the opex period.

If such a top does occur, it should still set up another excellent buying opportunity given that there has only been one annual high in the month of March since 1948.

I must admit I have no edge here, but am definitely intrigued to see whether recent history prevails or the market slowly reverts to its more usual historical patterns.

Ever interesting,

-D

OPEX Periods from Feb 2021 to Jan 2020 – more early opex week extremes than normal

• Feb 2021 – Topped on Opex Tuesday post holiday
• Jan 2021 –  Topped on Friday before opex week. (high for the week was opex Thursday and the low and the MAJOR Bottom was on opex Friday. The SPX then rallied 3.3%  before pulling back again.
• Dec 2020 – a much more normal opex week – especially for Quad opex week with an Opex Monday low and Friday high, but then the Monday post opex saw that amazing 100 plus pt overnight collapse on the Monday post opex – which then created the post opex MAJOR Bottom.
• Nov 2020   – Opex Monday high and then the MAJOR Bottom on Opex Thursday that set up the next stage of the rally
• Oct 2020 – Opex Monday high which then started the 8.9% fall in to the 30-Oct bottom.
• Sept 2020  – Actually, saw the low on Friday 9/11 and then a rally in the opex Wednesday high before the 6.8% continuation of the correction
• Aug 2020 was a very narrow range week that saw a continuation of the rally
• July 2020 – Saw a sharp 3.3% drop from Opex Monday to opex Tuesday
• June 2020 – Saw the June corrective low MAJOR Bottom on Opex Monday and then a 6.4% rally to the Tuesday post opex
• May 2020 – Saw the Opex Tuesday high, then a 6.1% drop to the opex Thursday MAJOR Bottom
• April 2020  Had a 100pt SPX drop in to Opex Monday and then a 5.9% rally in to Opex Friday (the low was then tested, but held on the Tuesday post opex
• March 2020 Saw a Monday high for the week and a Wednesday low before finding the final bottom on the Monday post opex
• Feb 2020  Has the MAJOR High on Opex Wednesday (post holiday) and then down the market went
• Jan 2020 Was a fairly normal opex week with a steady rally all week until topping on the Wednesday post opex and post holiday and falling 3.7%.

In those 14 opex periods that is 9 extremes during the first two trading days of Opex week  – which is far more than would expect as the first two days of the Opex period are generally the least likely days to experience an opex extreme.

22-Feb-21 Post February  Opex  Comment

Last week, I was expecting that there would be a lot of bearish commentators highlighting the similarities between Jan-Feb 2020 and this year. I have been surprised that there have not been, as anyone that does compare February 2020 and February 2021 are right. There are a lot of similarities.

• In both years, the market has been persistent and rallying strongly since October lows from the previous year
• The pullbacks have been minimal – 9 days was the most in January 2020. While the January 2021 pullback was just 3 days. Both bottomed on the last trading day of January and then surged higher.
• The trade last year was a bit choppier in February, but both have made all time highs during the February opex period.
• In both years, the SPX is also trading above its monthly upper bollo band and has been for a number of months.
• The SPX gapped down on the Monday post opex week in both instances.

The  similarities are impressive.  BUT it must be highlighted that the February 2020 MAJOR TOP in Opex was a rare event.

• During the February Opex period, there have only been 3 MAJOR TOPS that initiated multi week downtrades – all of these downtrades then terminated during the March opex period at new lows for the year and then new rallies began.
• All of these downtrades (2007, 2011 & 2020) were not a result of US issues, but troubles that occurred initially in Asia. (In February 2007 and 2011 there were economic concerns – as well as the Japan Tsunami in 2011. Last year, the virus originated in China)

The “bearish” concerns about super stretched markets, expensive valuations, etc are all historically valid, but the market is in a “persistent mode”, and when the market is persistent, these points do not matter – until they do; and there is no tell for when a persistent market period will end.

• In September, it was after 163 days and a 64.4% rally
• In February, 2020, it was after 139 days and a 19.1% rally.
• The Dec 2018 to May 2019 persistent rally lasted 126 days and was 26.2%
• The longest persistent rally was the Nov 2016 to Aug 2017 19.5% rally that took 277 days.

The average persistent rally has lasted 142 days with a median of 126 days.

• The current rally from 30-Oct-2020 is 22.2% in 114 days.

It should be noted that all but three of the 16 persistent rallies since 2009 have ended either early in the month (eg 2-Sep-2020) or during an opex period (eg 19-Feb-2020). The one recent exception was the Vixplosion end to the August 2017 to January 2018 persistent rally that lasted 158 days and carried the market 18.0% higher. It ended in late January with no primary catalyst.

So WHAT does all of this mean for this FEBRUARY Opex Period?

• First off, February opex is generally either a short term top on opex day or post opex or a rally continuation. The last time there was a February opex period bottom was the 6.9% post opex bounce in February 2009.
• It should also be noted that the last 3 opex periods have all resulted in short term sell offs that ended up being good buying opportunities and catalysts for new highs

-Nov 2020 – The second Monday gap up and high on vaccine news. The SPX had a short term top on Opex Monday, but the primary turn was the bottom at 3518 on opex Thursday.

-Dec 2020 was unusual with that panicked Sunday night / Monday morning post opex sell off that produced that surprising MAJOR Bottom on the Monday post opex at 3636.

-Jan 2020 was again slightly unusual with a high on the Friday before opex week, but again it ended up producing a decent buying opportunity on opex Friday near the 20 day MA at 3750, which then produced the rally in to the January high at 3871.

RECENCY also favors  an opex buying opportunity as all dips have been bought with the longest sell off since October 2020 being 7 days long – the sharp January pullback was just 3 days.

While it is possible that Tuesday’s high at 3950 is a top of some significance (like February 2020), it seems unlikely for the following reasons:

• There are no significant catalysts (like Corona or economic issues in Asia) that would cause long term holders to sell.
• Right now, rising bond yields or a stronger dollar do not really matter to most people.

Given all of the call buying that has been occurring, my sense is that these recent opex period pullbacks are somewhat purposeful and option related.  This means the highest probability is for the market to form an opex period bottom between today and the end of the opex period on Wednesday.

It is also possible that the sell off continues a bit longer as the SPX does tend to be weak in to the end of February and then experiences strong bounces around the 1^st of March.

The one thing that I need to note is that highs early in opex week (or pre opex as in January 2021) are unusual and generally associated with bear markets, not bull markets.  The only recent month that had an early week high that did not set up an opex period buying opportunity was last October.  Back then, an opex Monday high resulted in the 18 day 8.9% pre election sell off.

Bottom Line:

The market is in a persistent mode and except for October 2020, the recent opex periods with early week highs have all produced solid buying opportunities and new all time highs.  Without a significant and surprising catalyst, it would be historically unusual for Tuesday’s high to be a notable MAJOR top.  It is always possible – it is just not likely given the market’s recent history, its current persistence and the history of MAJOR February opex tops (just 3 since 1998 – all with significant catalysts). Instead, it seems likely the market is setting up another solid opex period buying opportunity. The primary questions are just when and at what level.

I will leave the levels and short term technical conditions to PUG, as he has had a very good feel for these things.

It is the middle of the two week winter SPORTS holiday in Switzerland right now, so my commenting will be light.

-D

JANUARY 2021 Opex Period comments (As of close of business on 11-Jan-2021)

My initial January opex period comment assumed a rally in to opex week, as that has been the predominant opex week occurrence now since November 2016 (Market has rallied in to opex week over 80% of the time since 2016 – before 2016 it rallied in to opex week about 60% of the time).   Monday’s price action has forced me to adjust my comments a bit.

• The number one point is that since 2013, a close for the SPY above its upper daily bollo heading in to opex week was not bearish, but Monday’s gap down and fall changes that perspective a bit.

Overall, the picture for the market is historically now more MIXED

• Until Monday’s fall, the history of January opex suggested a continued rally in to late in the opex period or possibly just a rally continuation and no opex turn.  Persistent markets do not always have opex turns – see August 2020 as the latest example.

• With Monday’s gap down and fall, there are a few instances that might hint that Friday was a more significant high and could produce a multi week pullback in to February.

• BUT, it should be noted that the April 2020 and June 2020 opex periods started with gap downs on Opex Monday and Monday was then the low for opex week. (which is not what used to occur, but is now becoming a new “normal” when the market is persistent)

After Friday’s close above the upper bollo, Monday’s gap down and fall is a RARE Opex week occurrence!

• There have been 16 instances since 1998 where SPY closed above its upper daily bollo on the Friday before opex week.
• Only THREE TIMES has it ever fallen in to opex week (SEP 2005, May 2009 and September 2012)  and only ONCE did it GAP DOWN significantly and not fill the GAP (May 2009).

Here is what occurred in those 3 instances

• September 2012 was a MAJOR TOP on the Friday before opex week and the market did not bottom until November 2012 opex day, but opex week was a mild pullback.
• May 2009 was a MAJOR TOP on the Friday before opex week that produced a 13 day 5.2% pullback.
• September 2005 was a MAJOR TOP on the Friday before opex week that had a very narrow opex week range, but ultimately the market pulled back in to the middle of October

Overall, the 16 instances where the SPY was above the upper daily bollo on the Friday before opex week have a SPLIT HISTORY.

• In 5 of the 7 instances before 2013, it was bearish with the market heading lower during opex week. (April 2010 was bullish and then the flash crash top occurred shortly afterwards. In Jan 2007, the market was fairly flat and in an up and down range until resolving higher with a low on 26-Jan-07)

• In the 9 instances since 2013, starting in March 2013 and going through December 2019, it has been bullish with only one MAJOR top (June 2018 – Opex Wed top and a 12 day 3.7% pullback) and FOUR rally continuations. (ie. very bullish still)

Another persistent market period

Overall, the market continues to be persistent, particularly the MID and RUT, which have been persistent since September, a month longer than the SPX and NDX.  When it is persistent, the SPX can stay persistent for up to 9 months (2017).   The 7 persistent markets that started with bottoms in November or earlier have a mixed January history with 3 ending in January and 4 continuing in to at least February.

Bearish – 3

• January 2010 (from July 2009) post opex top ended the market’s run since July 2009 and the market fell in to early February
• January 2014 (from October 2013) Tuesday post opex top produced a sharp fall in to early February
• January 2018 (from August 2017)  rally ended on 26-Jan-18 and there was a PLUNGE to the 200 day MA in early February

Continued rallies -4

• Rally from August 2010 did not end until February 2011 opex
• Rally from November 2012 did not end until May 2013
• November 2016 rally stayed persistent until August 2017
• October 2019 rally did not end until February 2020 opex

While I am currently doing some more extensive research, I do not have any evidence as to why and when persistent markets end. They just do, at some point in time, when sentiment and technicals overwhelm the “buy the dip” approach. (The FED is also a MAJOR factor – see September 2018 as the most recent instance)

OPEX Period since the March 2020 bottom

Except for the August opex period (rally continuation), opex has actually been the turning point that has consistently produced MAJOR turns in the market (unlike employment, the FOMC and holidays), but there has not been an identifiable pattern.  The primary turns when they have occurred have all been MAJOR. There has always been one and sometimes more than one Opex WEEK turn and the changes in market direction have been far more frequent than normal:

• April 2020:  Gap down to start the week (Monday was the low for the week) and then a strong rally with a MAJOR TOP on Opex Friday near the close and a MAJOR BOTTOM at the close and an even stronger rally on the Tuesday post opex
• May 2020: A MAJOR TOP Plunge from the open on Opex Tuesday and a MAJOR Bottom on Opex Thursday near the open
• June 2020:  A MAJOR Bottom at 9:30am on Opex Monday and a MAJOR TOP on the Tuesday post opex
• July 2020:  A MAJOR TOP above the upper daily bollo on Opex Monday and a MAJOR  Bottom at the 20 day MA on Opex Tuesday
• August 2020: Rally continuation
• September 2020:  MAJOR TOP at 20 day MA on Opex Wednesday
• October 2020:  MAJOR TOP above upper daily bollo near the close on Opex Monday
• November 2020: Minor top near the close on Opex Monday and a MAJOR Bottom near the open on opex Thursday
• December 2020: Minor top at the close on Opex Friday and a MAJOR Bottom at 10:30am on Monday post Opex.

Mondays have been a key day more than usual in 2020 and early 2021 so far with quite a few significant events occurring on Mondays:

• Notable Bottoms: March post opex bottom, both June pullback bottoms, December post opex bottom, most recently, the January 3^rd bottom
• Many Gap Up and Go higher Mondays:   Post Vaccine news in November and numerous other instances like post May opex
• Tops:   October opex Monday top is the most notable one. The July opex Monday top was good for a 3.5% pullback, the November Opex Monday top was a bit less.

JANUARY Opex History:  Mixed history for turns – no strong edge

When there is a January opex turn, they can be significant – most of them are post opex or late in the opex period.   BUT, it should be noted that there have also been a lot of rally continuations.

• MAJOR Bottoms: 2005 (Monday post), 2008 (Tuesday post), 2009 (Tuesday post), 2015 (Opex Friday) and 2016 (Wednesday post)
• MAJOR Tops:  2003 (Opex Monday), 2010 (Tuesday post), 2014 (Tuesday post)
• Rally Continuations:  2004, 2012, 2013, 2018 (but then MAJOR top – 1 week later)

Quite a few traditional technical indicators like the upper Bollinger bands suggest a correction should be near:

• SPX – 3 months above the upper monthly bollo
• RUT – 3 months above upper monthly bollo, 7 closes in a row above the weekly upper bollo ending in December and also traded above, but did not close above the upper weekly bollo last week. 
  • Also, highest weekly RSI (9) at 81.5  since April 2010 83 reading the week before the April 2010 top
  • RUT Forward PE is also estimated to be above 80.
• Plus, the Cobra stats about distance to the 200 day MA, etc…

BUT, as the market has proven over the years, only price matters and it can remain stronger and more persistent for far longer than people could predict or possibly expect it to.  

Bottom Line:

Monday’s gap down after Friday’s close above the upper daily bollo band has sent another warning signal to the market, but until there is downside confirmation with multiple consecutive down days and also follow through lower after a BIG down day (greater than 1% drop), one must expect the market will continue to rally and will remain persistent for at least a while longer, if not quite a lot longer.

It may not make a lot of sense to most market historians, technical analysts or value oriented investors, but until there is an actual sell off that turns market sentiment, the path of least resistance is higher. This is simply the way the market operates when it is in a persistent state.

The message from market history is definitely mixed. Persistent markets MUST BE respected, but it should also be noted that of the 15 persistent market periods since 2009:

• 7 ended during the opex period,
• 3 ended during the very beginning of the month (eg 1-May-19, 2-Sep-20),
• 3 ended post the employment report
• 2 ended on the 26^th of the month (April 2010 and Jan 2018)

For now, PUG has a great feel for the market and his levels and perspective are a very good guide for how to proceed.

-D

Detail info:

FRIDAY BEFORE Opex week – SPY closed above upper daily bollo –

1. 14-Jul-00  – MAJOR TOP on OPEX MONDAY and a sharp 11 day fall to below the lower daily bollo
2. 9-Sep-05      MAJOR TOP on Friday before opex week and a fall in to Mid October.
3. 12-Jan-07  minor bottom on Monday post opex
4. 8-May-09   MAJOR TOP on Friday before opex week and a 18 day fall
5. 9-Apr-10   Market moved between upper bollo and 20 day MA until peaking on 26-Apr-2010 and then fell till well below the 200 day MA after the FLASH CRASH in May
6. 14-Jan-11   minor bottom on Opex Thursday at 20 day MA – market then continued higher until a sharp one day plunge on 28-Jan-11
7. 14-Sep-12  MAJOR TOP on Friday before opex week and a mild fall till November opex day.
8. 8-Mar-13  minor top on Opex Thursday and a brief pullback to 20 day MA
9. 13-Feb-15  minor top on Wednesday post opex – then did fall below the lower daily bollo in March
10. 9-Dec-16               minor top on Opex Tuesday  – the market then stalled and fell until making a bottom on the last day of the year below the 20 day MA
11. 10-Feb-17    Rally continuation
12. 14-Jul-17        Rally continuation 
13. 12-Jan-18      Rally continuation  – this was part of the SUPER strong rally that peaked on 26-Jan-18 and then the VIX exploded and the market collapsed to the 200 day MA in early Feb.
14. 11-May-18   minor top Tuesday post opex
15. 8-Jun-18     TOP on Opex Wednesday and 3.7% fall to just below the lower bollo
16. 13-Dec-19    Rally continuation