March quadruple witching, interest rates haunt Thursday stock action
WASHINGTON – Thursday’s seemingly moderate market gloomfest promptly bumped Wednesday afternoon’s positive, post-FOMC party back to square one. One reason: Wednesday’s benign interest rate environment did an about face Thursday, kicking the 10-year Treasury quote up to current record levels. In addition, that always volatile March quarter quadruple witching phenomenon, happening tomorrow, also looms, threatening death via options for any number of mispriced stocks.
Fox Business provides us with a decent 12:30 p.m. ET recap for Thursday’s stock market action thus far.
“The S&P 500 futures and Nasdaq were lower by 0.51% and 1.3%, respectively. However, the Dow Jones Industrial Average moved back above the 33,000 level with modest gains. Components Goldman Sachs Group Inc. and JPMorgan Chase & Co. outperformed as the selloff in the U.S. Treasury market caused the yield curve to steepen.
“The Dow closed at a record high Wednesday after the Federal Reserve held its benchmark interest rate near zero and reiterated its pledge to use all of the tools at its disposal, if necessary. The central bank lifted its growth and inflation forecasts for the current year.
“The Fed’s comments caused further selling of U.S. Treasurys on Thursday with the 10-year yield rallying 11 basis points to 1.75%, its highest level since January 2020.”
The interest rate / bond price rule restated
Once again, for stock market newbies, US Treasury issues, like most bonds, pay a fixed interest rate. That means that trading in these issues causes pricing to vary, as daily pricing adjust to price in an increase or a drop in prevailing interest rates. In other words, when interest rates move down, bond prices move up. And when interest rates move up, bond prices move down. And down those prices moved Thursday as the current interest payout rate jumped.
In other words, your variable rate mortgage and / or the interest you pay on your credit card balances may inch up. Nobody likes this very much, and stocks – particularly tech issues – tend to drop in price as bonds start becoming very competitive, yield-wise.
And then, there’s quadruple witching…
But, in addition to the interest rate moves today, quadruple witching…well, by way of explanation, let’s borrow Investopedia’s definition of this exotic term.
“[Quadruple witching is the] date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September, and December.”
“Futures” aren’t actual stocks or hard assets, but instead, they’re contracts essentially “betting” on stocks or hard assets. Unlike stocks, futures contracts expire. Meaning you can lose all the money you put into them if they don’t go your way. For more details, check with your broker or follow the above Investopedia link.
The Twin Tylers explain it all for you…
For the just-stated reason, investors tend to get spooked on quadruple witching days, leading to often gnarly stock market action in the day or two leading up to each magic Friday, as the Twin Tylers at ZeroHedge more or less explain.
“The highly anticipated Fed meeting is now in the rearview mirror, but for weary traders sitting at a fresh all time high in the S&P, the week is not yet over as another major market event is on deck: we are talking about Friday’s quad-witch (quadruple expiration) when once a quarter on the third Friday, we get the simultaneous expiration of stock index options, market index options, individual stock company options and single-stock futures.
“At the 30,000 foot level, two things make Friday’s quad-witch especially notable: the relatively small size of Friday’s event, and the dismal liquidity going into it.
“As Goldman [reports], when measured in contracts (or percent of SPX market cap), the SPX open interest expiring this Friday is the smallest for at least a decade. The 4.0 million March contracts outstanding are just 60% of the open interest at this point in the volatile week approaching March-2020 expiration.
“According to Goldman, the reduced SPX open interest reflects volume continuing to spread around the calendar instead of being concentrated in just the quarterly expirations. Meanwhile, the rising SPX index level has left the bulk of March open interest (87% has strikes of 3900 or lower) below the current index level, so expect marketwide gamma [Option volatility. But see more here.] to have limited impact on trading dynamics this week.”
What does all this quadruple witching / interest rate bafflegab actually mean? We attempt to simplify…
All this quadruple witching / bond interest rate stuff may seem like so much gobbledygook. Some of it even looks like that to me. But boil it all down, and it means we’re likely in for some stock market volatility from today through to early next week. That applies particularly to issues whose quadruple witching day option action is nearing the frantic zone, which happens Friday. And the increasing virtuality of the Biden administration / junta doesn’t help here either. The country is being led by a void, and both our citizens and the rulers of most countries would readily agree. Which puts everything at extreme risk, even though it may not seem so at the moment. And this influences markets, too. A lot.
Piling on, several commentators also worry about a lack of liquidity in some investment areas. This recurring problem has caused numerous, primarily bearish issues in the past.
As a result, I’m mostly on the sidelines today, making a few adjustments but no major commitments in our portfolios. I’m also keeping in mind that the usual, nearly clichéd “sell in May” rule may prove a movable feast in 2021. Why? Most taxpayers now have an opportunity to delay filing their 2020 returns until May 15, 2021. Given new info and tweaks the IRS must apply to rules and forms governing those 2020 returns, the agency announced a month’s grace period for filing on Wednesday afternoon.
In other words, it’s a bit treacherous out there for investors right now. So we’re staying on the high-cash side for now until the smoke clears a bit.
– Headline image:
Tomorrow, March 19, 2021, is quadruple witching day. But the most witches we could find numbered three. Unless you count the devil as number four. Scene from Macbeth, depicting the witches’ conjuring of an apparition in Act IV, Scene I. Painting by William Rimmer. Public domain image, via Wikipedia entry on “Three Witches.” Edited to fit CDN format.