Nomura Says Cyclicals May Sink After Options Expiration Day

(Bloomberg) -- Charlie McElligott often makes predictions about the behavior of stocks around options-expiration days. This month, his forecasts may have extra relevance given the attention to the value debate.

The Nomura Securities cross-asset strategist says that going into “quadruple witching” later this month -- the quarterly expiration of options and futures on indexes and equities that can often add to volatility -- cyclically sensitive stocks and assets may get a boost. The increasing number of strategists on the lookout for a potential rotation to cyclical and value shares may want to take note.

“The trade into June 19 will be very ‘risk-on' with stocks up led by economically sensitive cyclicals/beta/small caps, bear-steepening in U.S. Treasury curves, crude and commodities higher,” McElligott said in emailed comments June 4. “However, after these massive volume quarterly options expirations, historical performance shows us that the post-trade should get slightly more defensive in nature, as we'd expect stocks to fade marginally with volatility incrementally higher in the days immediately after.”

The cyclical trade has gotten more attention in recent weeks as the global economy begins to show signs of recovery from the devastation of Covid-19, and places like the U.K., New York and California prepare to open up. Some have declared the value trade “dead” because it's underperformed for so long, though recently investors have started to pile into those stocks, which would be expected to perform well in an economic recovery. The Russell 1000 Value Index has outperformed its growth counterpart significantly, with gains of 13% and 6.3%, respectively, since May 15.