A Mathematical Turning Point?  

Quant traders, pay attention to the mathematical cadence of the market. 

Like this: The stock market turned with August month-end expirations. For more on month-end index-options expirations, see this from the CBOE.

These month-end CBOE contracts are “European-style” instruments, meaning they’re used on the day of expiration. Importantly, “SPX EOM options allow asset managers to more precisely match SPX option expirations to end-of-month fund cycles and fund performance periods.”

That last sentence is why we pay attention. 

They’re signals about fund cycles.  What do I mean by “the stock market turned?” Behavior changed.  As I write Aug 4, the broad measures are all up sharply.  Recognize this as the counterparty to Friday’s big decline. UNLESS trends change, it’s a one-day event. 

This signal then is either a different fund cycle in S&P 500 stocks, or the impact of the loss of collateral if netting (the difference between the exercise and settlement prices) is negative. 

Now, sure. There are other things going on. And again, none of us knows what tomorrow brings.  The sudden caterwaul in August 2024 was fleeting and blamed on the yen carry trade, and trouble evaporated in a snapback like Apr 8-9, 2025.

But. Behavioral change matters and it’s mathematically measurable:

Volatility in SPX stocks has spiked to 2.6% the past five days, above the 5, 20, 50 and 200-day averages.  Meaningful?  In the sense that it’s like hitting a spate of turbulence on a plane that prompts the pilots to hunt for smoother air. It’s a change. And volatility in ETF trackers of the S&P 500, which tend to run at about half the underlying basket’s volatility, shot up the past three days from a languid 0.6% to over 1%.

Conclusion? Volatility is up.  Why?  We turn to behaviors. 

At EDGE (sign up for our free daily Market Desk Notes), we measure “Broad Sentiment,” the Demand/Supply balance in S&P 500 stocks. We normalize the measure to a 10-point scale. At 6.0, the market is topped. It’s not that the market tips over there but that the probability of gains diminishes until Demand bottoms, and Supply recedes.

A note on “Supply,” it’s Reg SHO Rule 201 “short volume” data.  For the first time ever back to 2012 when there was sufficient data after 2011 Finra inauguration of the reporting requirement to have a 200-day average, the 5, 20, 50 and 200-day reads are all over 50%.  And the five-day average shot up Friday to 52.2%.  A one-day gain isn’t a pattern, but rises in short volume tend to run an average of seven days on a trend basis.

So we’ve got topped Demand, rising Supply, and suddenly higher volatility.  A turning point. 

Let me give you one more: Since January 2, the average move vs daily midpoint in ETFs tracking the S&P 500 is seven basis points.  Not unusual. The market’s unremitting capacity to return to a level just over midpoint is explained by the pervasiveness of money tracking the benchmarks like the S&P 500. 

During a brief stretch in April, the spread vs midpoint jumped to 45 basis points, and then dropped to a single basis point Apr 14 – the bottom (the day I leveraged long into the SPX). 

In the last two days it’s averaged 34 basis points.

Look, it may mean nothing. It’s math and math changes as inputs evolve.  Big Tech still looks good from a Demand/Supply view. But the Tech sector has deteriorated. So has Communications Services, Consumer Discretionary, Financials, Health Care. That’s most of the market. Sixty-four percent of the market is topped or headed down, just 36% is bottomed or rebounding, from a Demand view.

My conclusion?  We COULD go into an extended slide because the fund cycle has changed. Doesn’t mean we will.  But I don’t trust prices. I trust Demand/Supply balances.  It’s math.

PS – If you want to hear more, join us Aug 7, 230p ET, at the live EDGE Demo and Discussion! And become an EDGE subscriber for access to our model portfolios.