Friday, August 24, 2012

Stocks End Week with Gains (as usual); Do Weekly Options Drive the Markets?

Stocks finished the week with outsize gains on a virtually dead news day, which makes one turn to head-scratching and contemplation over not only the general direction of the market, but why stocks perform better on Fridays as opposed to, say, Mondays, which, of late have been among the worst days on a week-by-week basis.

It might have something to do with the advent of weekly options contracts - a relatively new market development - in which "bets" are placed on the direction of everything from stocks, to EFTs, to entire indices.

Since Wall Street is such a crooked, rigged casino type of operation, the club of insiders which invent such derivatives cooked up weekly options - which expire every Friday - as yet another way to skin the hapless rubes who aren't content with the usual durations of one, two, three, four months or longer.

Weekly options are nothing but pure, unadulterated gambling on direction, just about the same as betting red or black at a roulette wheel, but, a peek at direction on Mondays (when positions are initiated) and Fridays (when they are closed) over the past ten weeks reveals an unsettling pattern.

Using the Dow Jones Industrials as our test case, beginning with the 18th of June (a Monday) and continuing the series through today, the tally is remarkably consistent:

Mondays: 1 Up; 9 Down
Fridays: 8 Up; 2 Down

Amazing! Isn't it? If one can count on Mondays and Fridays being the only significant market moving days, trading - especially in options contracts - becomes almost a predetermined routine, something that could be gamed by a relatively simple algorithm.

Oops! Did we let the cat out of the bag? Since algos, via HFTs perform between 75 and 90% of all trading in the markets, could it be that the Goldman Sachs and Merrill Lynch's of the world are doing exactly that from the comfort of their prop desks? One can only imagine the traders, feet propped up neatly on their desks every Monday morning, programming in massive sell orders on various stocks while simultaneously sending the algos out to buy calls on the very same equities.

If that's the case, these traders are probably spending most of the midweek out on the golf course or the yacht or partying with their rich buddies in the Hamptons or other secret enclaves of the privileged class. Why work, when you have concocted such a simple trading regimen that only needs your attention twice a week? Even better, these prop jockeys are probably initiating positions and closing out trades with commands from their cell phones while sipping mai tais by the pool or at the beach.

Life just can't get any better, can it?

The worst part about this story is not how the rich enjoy their lives without working, but the idea that there's likely a kernel of truth to it.

Almost as good as farming, where the common wisdom is that farmers plant in the spring, harvest and sell in the fall and vacation all winter, these prop traders are just taking loafing to an all new level of expertise and functionality.

Life is so easy! BTW: Silver closed at a 3 1/2 month high today. Thank you, Blythe Masters and JP Morgan.

In keeping with our ongoing, sporadic tradition of musical thematic revivalism, perhaps the Rolling Stones' You Can't Always Get What You Want, from their 1969 album Let It Bleed is appropriate.

Have a great weekend and remember to be selling on Monday.

This is the original cut from Keith, Mick and the boys. It doesn't get any better.

Dow 13,157.97, +100.51 (0.77%)
NASDAQ 3,069.79, +16.39 (0.54%)
S&P 500 1,411.13, +9.05 (0.65%)
NYSE Composite 8,047.48, +36.04 (0.45%)
NASDAQ Volume 1,326,204,750
NYSE Volume 2,581,308,750
Combined NYSE & NASDAQ Advance - Decline: 3459-1968
Combined NYSE & NASDAQ New highs - New lows: 113-48
WTI crude oil: 96.15, -0.12
Gold: 1,672.90, +0.10
Silver: 30.62, +0.17

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