Editor’s Note: Sam Collins will be on vacation through June 25. Filling in for him are two other top technical analysts, Chris Johnson and Jon Lewis. 

The market eked out another positive trading day as late-afternoon strength lifted the major indices into the plus column. The morning economic data gave little bullish fodder for investors; however the strengthening euro helped the market ease some of the continued tensions around the sovereign debt crisis that still haunts the day-to-day action.

From a sector perspective, the session ended mixed for the second day in a row, as six of market’s 10 sectors were in positive territory. Utilities (+0.8%), consumer staples (+0.7%) and tech (+0.5%) led the positive sectors, while consumer discretionary (-0.6%), materials (-0.3%) and financials (-0.1%) rounded out the weaker performance.

There are no economic reports or major earnings reports scheduled for today, which means that the main driver in the market is likely to be the expiration of June equity options. While many analysts have been suggesting that the options expiration is likely to add another layer of volatility to the market today, we see it another way.

The market has been unable to trade higher over the last few days as a number of ETFs that track the benchmark indices such as the S&P 500 (SPX) by way of the SPDR S&P 500 (NYSE: SPY), have large amounts of at-the-money open interest that expires today.

Why would that matter, you ask? Well, our quantitative studies show that, historically, equities and ETFs are typically attracted to large open interest strikes as expiration approaches (we refer to it as “pinning” the strike). 

In the case of the SPY shares, there are 162,000 calls open at the $112 strike, indicating a high probability that the SPY will “pin” $112 at the close today. The same phenomenon applies to individual equities that have large open interest strikes, which is why we track daily open interest changes for more than 2,000 stocks.

We mentioned yesterday that there are a number of inflection points occurring at the sector level. The growing number of these occurrences suggests that the market will gain momentum as we head into the end-of-the-month trading environment. We expect the fact that there are large amounts of institutional money on the sidelines that will have to be allocated back to stocks to fuel further gains in the market.

Lowering the microscope to the sector level, there are some groups of stocks that are clearly seeing a larger percentage of their companies shifting into short-term bullish mode. 

The table below displays 21 of the more heavily traded sector ETFs, along with the percentage of component companies that are in the midst of a bullish inflection.

The top of the list represents sectors and ETFs that are undergoing a transitional shift into short-term bullish patterns. This means that not only are these groups of stocks or ETFs set to outperform the market, they also hold a larger number of candidates for investments that will rapidly outpace the S&P 500 and other benchmark indices. In other words, these sectors are target rich environments for bullish investments.

Now, what these stats don’t reflect are a few sectors that were already in short-term bullish mode like the metals and mining group. We’ll focus on a few of these sectors/ETFs on Monday to provide even more detail into the current bullish landscape.

For today, expect lower volatility with little to no movement in the overall market as options expiration should play a heavy hand in determining where the market comes to rest at 4 p.m. Eastern time. While everyone would love to think that the market is free to move where it may, the fact is that options and other derivatives have days that they determine the market’s move, and expiration is the most influential. Given the market’s pre-expiration movement, there’s little room over head.

With that said, we do expect next week to be a different story, and we’re excited about the pending move in the market that should begin on Monday. We, of course, will fill you in more on that on Monday morning. Until then, happy trading.

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