Case for a Santa Claus Rally Grows
Once the smoke clears from options expiration, speculative trading should pick up pace.
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Market action improved on Thursday, amid a strong earnings report from Micron (MU) and a softer-than-expected consumer price index report. But investors remained cautious as they awaited an interest-rate decision from the Bank of Japan and the expiration of options on Friday.
The Bank of Japan hiked rates by a quarter percentage point to 0.75%, the highest level since 1995, but the press conference following the news surprised investors with a slightly dovish tone, causing the yen to drop against the dollar and supporting stocks.
Options expiration on Friday is at record levels with $7 trillion notional value in play. Options expiration often creates a phenomenon known as “pinning,” where a stock tends to close at a strike price with a large amount of open interest. Stocks tend to gravitate toward the strike price where the most options will expire worthless, resulting in the maximum financial loss for options buyers and the maximum profit for options sellers.
Options expiration is driven by strike prices rather than fundamentals or technical factors, which creates a short-term distortion. This is the last major scheduled event, however, before the end of the year.
Next week, there will be low volumes, seasonal flows, tax selling, portfolio adjustments, and limited news, which traditionally help to create conditions for a Santa Claus rally. The poor action of the past week or so has helped to create a technical setup that may give a Santa Claus Rally a boost if the bulls can start to generate some positive momentum.
We have a positive open on Friday, developing as Oracle (ORCL) receives a boost from news that TikTok has reached an agreement to sell its U.S. business to a joint venture controlled by Oracle, Silver Lake, and Abu Dhabi-based MGX, which will control 45% of the U.S. entity.
I’m optimistic that we will have favorable trading action to end the year. The recent pullback has created some very good opportunities in individual stocks, and once the smoke clears from options expiry, speculative trading will pick up pace.
At the time of publication, DePorre had no position in any security mentioned.
