OPEX Looms: 3 Reasons Markets May Need to Digest

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Over the past three weeks, the major U.S. market indices have gained strength and have held their 2022 lows. Beaten-down stocks such as Tesla TSLA, Alibaba BABA, and Apple AAPL have rallied back fiercely off their recent swoons. Today we will provide our opinion on the short-term view of the market:

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Options Expiration Often Leads to Short Term Choppiness

Monthly options expiration in U.S. markets typically falls on the third Friday of each month. This Friday marks monthly options expiration. Options expiration, also known as OPEX can lead to increased choppiness in the stock market because as options expire, bulls and bears often alter their positions as time runs out. The outcome of these modifications results in increased volume and volatility in the specific stock and the market itself. Furthermore, options that are “in the money” at the time of expiration get exercised – increasing trading volume and volatility to a greater extent.

Earnings

The market is smack dab in the middle of earnings season. Earnings can often lead to increased volatility and choppiness as well. Tuesday was a perfect example. Shares of Morgan Stanley MS popped after the banking giant beat earnings expectations Q4 expectations.






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Meanwhile, Goldman Sachs GS sank after reporting a larger-than-expected drop in Q4 profits.






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More key earnings reports with market moving potential are on tap later in the week, such as streaming giant Netflix NFLX and consumer products king Proctor and Gamble PG.

Is Frothiness Creeping In?

The market is showing some subtle signs of frothiness in the short term. First, the Williams % R Oscillator is at the most overbought levels since late November when the major indices each shot up 5% in a session. Of course, overbought can become more overbought and does not necessarily mean the market will fall precipitously. However, it does usually mean that the odds favor some sort of back and fill or corrective price action.






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Highly speculative equities like meme and crypto stocks are rising rapidly. Usually, these price moves occur when things get a bit too hot. For example, Bed Bath and Beyond BBBY is on the brink of bankruptcy yet it has tripled in the past few weeks. The Valkyrie Bitcoin Miners ETF WGMI is up 87% in the past two weeks of trading. Chinese ecommerce retailer Vipshop Holdings VIPS has moved higher for eleven weeks in a row and doubled in that period.






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Lastly, Tesla, which is up 30% in three weeks’ time, saw a tremendous amount of call option activity pour in. Traders doled out a whopping $50 million on call premium alone Tuesday.

Conclusion

The intermediate and short-term trends remain higher after stocks were able to hold their 2022 lows and rally over the past few weeks. With that said, investors have some potential obstacles to contend with in the short term and should not get caught chasing an extended market with too much exposure as options expiration and key earnings loom. As always know your time frame and mind your risk accordingly.

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