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Metric Test: When Earnings and Expiration Collide


Four times a year, Wall Street is overwhelmed by the confluence of earnings and expiration.


Let the Sunshine
Let the Sunshine
Let the sun shine in….

Four times a year, Wall Street is overwhelmed by the confluence of earnings and expiration. As fresh fundamental data points litter the landscape, the structural machination of option expiry exacerbates volatility and pulls equities and their indices seven ways till Sunday.

It's also been known to pull hair from the heads of traders and that, for those of us with negative gamma, can be a pretty frustrating affair!

Last week, we walked through the four primary metrics that serve as legs under the trading table. At different junctures, these influences jockey for position on the trading totem pole.

Sometimes technicals are the focus, as they were when the DJIA and S&P broke out.

At times, the structural forces wrestle control, as they did this summer.

And occasionally, the fundamentals stand up and demand attention, as they seemingly are doing this morning.

All the while, the overarching psychology is a fluid process that absorbs these (and other) inputs and assimilates them in kind. I've long believed that this metric is the top dog in the equation as perception is reality in the Street.

Sentiment-belief, confidence, credibility-above all else, will dictate our collective path as we edge through the most interesting juncture in the history of the financial markets.

This morning, on the heels of better-than-expected earnings from Intel (INTC) and Yahoo (YHOO)-along with not-so-hot results from IBM (IBM)-the early morning S&P futures are indicated 10 handles higher and the NASDAQ futures up twice that.

Will the fundies save the day? Perhaps-but given the "reactive" option traders around the street (negative gamma dictates that they get shorter as stocks trade higher and longer when they get hit), unforeseen influences will drive the price action.

I will simply ask Minyans to remember that earnings are but one of our four primary drivers and given all that's going on in the structural arena, it remains to be seen whether the sun will shine or hair will fall.

For if we don't, there's a good chance that the Minx will step up to remind us.

Random Thoughts

  • Given my personal fast market yesterday, I shoulda known that something cosmic was afoot!

  • Make sure you see the Indian SENSEX as it got jabberwoked for 9.2% last night after regulators said it may introduce investment controls that would restrict the inflow of capital from overseas funds.

  • The FT reports that US commercial banks have seen $280 billion of new debt come back onto their balance sheets during the summer credit crisis. As banks have had to accommodate this influx of assets, they have less room to lend out into the economy.

  • Anyone else find it odd that Japan didn't rally given the stateside earnings news?

  • First Data Corp (FDC) sold $2.2 billion worth of bonds on Tuesday ($1.5-$2 billion was initially planned, making it the first large LBO-related junk issue since the summer. That, perhaps more than earnings, is buoying sentiment this morning.

  • I remember meeting Professor John Succo when I stepped onto the Morgan Stanley derivative desk in 1991. We, as a community, are lucky to read his reflections to this day.

  • Festivus. Kids. Community. Professors. Music. Eats. Smiles. Yeah.


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