US Stock Sector Forecast – OEX Should Rally After Big Option Trade

The OEX 100 is consolidating at the upper end of the all-time highs. Prices have been moving sideways over the past few trading session, and the daily ranges have also been very tight. A large option position was taken on Thursday, betting that the OEX would continue to trend higher and hit new all-time highs, rising another 5% by mid-April. Historically the returns of the S&P 100 index have been mixed in February. With interest-rate at all-time lows and the Fed expected to keep rates on hold for the foreseeable future. With rates at these levels, companies’ discounted cash flows that produce significant earnings are more attractive. Technically, prices are overbought, and momentum has eased.

Unusual Activity

One of the best ways to monitor what traders are doing is to view options activity and especially unusual options activity. Unusual options activity describes an activity that is well beyond what is normally occurring. For example, when the volume is more than 50-times the usual volume at a specific time and the volume is more than the open interest and the prior day’s volume. This would alert you that a new trade could be on the books and if its large (more than 5K or 10K) contracts, its likely a hedge fund. Remember each option contract is worth 100 shares. So a 10K option contract is a 1-million dollar trade. On Thursday, someone purchased 50K OEX 100 out of the money options for April expiration betting that the price of the index would rise at least 5%.

Seasonality

Historically, the EOX 100 has mixed returns in February. During the last 10-years the index has increased 70% of the time for an average gain of 1.2%. During the past 5-years the index has declined 60% of the time for an average loss of 0.2%.

Technical Analysis

The OEX is consolidating in the second week of February following a robust first week that put the index up 5% for the month of February. Support is seen near the 10-day moving average at 1,773. Resistance is seen near the all-time highs at 1,791. Short-term momentum is negative as the fast stochastic generated a crossover sell signal. The current reading on the fast stochastic is 91.6, well above the overbought trigger level of 80, foreshadowing a correction. Medium-term momentum is positive to neutral. The MACD (moving average convergence) is printing in positive territory with a flat trajectory which points to some consolidation. The RSI (relative strength index) is moving sideways, printing a reading of 63, which is on the upper end of the neutral range but also reflects consolidation.

The Bottom Line

The upshot is the prices of the OEX is likely to trend higher after a period of consolidation. While prices are overbought in the short-term, there are large bets that the index will continue to rise. With interest rates at historically low levels, the best returns are likely in the large-cap S&P stocks. Technically, the trend points to higher prices.