My Stock Winners

As so many fear during expiration week, the markets experienced increased volatility last week as November option expiration approached. Fortunately, this increase in volatility was to the upside, as the major indices swung higher (the S&P 500 [SPX – 1,401.20] gained 1.5 percent) with investors continuing to move money into the market. But will the expiration run come with a cost, as stocks are now encroaching into overbought territory? For now it appears that the trend will continue to be our friend, though there are some cautionary signs appearing in this market landscape.

Option activity on the Chicago Board Options Exchange (CBOE) saw another surge of call volume through last week, pushing single-day readings of the CBOE equity put/call ratio lower. The trend in the ratio’s one-month moving average, which is often seen as a market timing indicator, is once again pointed lower, indicating that investors are increasing the number of traded calls relative to puts. As we have discussed in the past, this is often a sign that “sideline money” is flowing into the market, which of course drives stock prices higher. The market should continue to accommodate bullish investors as long as the downward trend in this put/call ratio continues.

Wrapping it up, this holiday-shortened week will likely produce some excess volatility as trading volume takes a rest. There should be some post-expiration selling after many stocks stuck their necks out reaching for last week’s new highs. The overbought market should add some pressure to stocks, but given the strong seasonality and fundamental strength driving this market, we are likely to see only a pause rather than a broad-based sell-off. On a cautionary note, the number of individual factors (i.e., the optimistic sentiment indicators discussed above) that can apply selling pressure to the market appears to be building. While this is not enough to cause our outlook to shift from short-term bullish to bearish, it is something to keep in mind should the trend stop being our friend.