Quadruple witching inspires irrational exuberance in Friday stocks
WASHINGTON, March 20, 2015 – As snow swirls outside the Maven’s home office in a Virginia suburb of D.C., we find it hard to believe that today is the first day of spring. But up in the Big Apple, they’re partying hearty today, perhaps because bulls finally feel like it’s springtime for Wall Street. As markets enter their final hour of trading for the week, the Dow is up roughly 190 points, the S&P 500 is gaining 19 and the tech-heavy NASDAQ is cranking away at a +36.
After yesterday’s action, stocks seem to be back in full mode as the Fed effectively threw in the towel on raising interest rates anytime soon, even though it eliminated the magic word “patient” from its Wednesday report, substituting phraseology that is even harder to parse but looks like interest rates won’t rise forever now, at least according to private statements a now private citizen Ben Bernanke spoke yesterday to a select few.
Specifically, Uncle Ben opined that interest rates would not rise again in his lifetime. At 61, a trifle younger than the grizzled Maven himself, this would mean, statistically speaking, in 17.6 years; given that current actuarial tables we just consulted would have Ben departing this mortal sphere at precisely the age of 78.6. That would put the next interest rate rise somewhere in the middle of 2032, according to our crack staff mathematicians. Party on, dudes!
In addition to this happy talk, it just happens to be Quadruple Witching Friday on Wall Street, another one of those Wall Street terms that requires explanation for those not familiar with the theology of this particular priesthood.
According to the rules (which are still there, believe it or not), stock options contracts always expire on the third Friday of each month as do other asset classes at various times. But on the third Friday of a month that ends the quarter (like March), stock index futures, stock index options, stock futures, and yes, of course, stock options expire on the same Friday.
Given that we have four major expirations on a day like today, trading gets heavy, volatile, and often more than a bit wild, as other interlocking positions also get squared up in ways that we’d need a book to describe accurately.
So, while every month’s Friday expiration action can be unpredictable, though often positive, end-of-quarter expirations—all four of them on the same timeline—have come to be known as “quadruple witching,” which witchcraft alludes to the often nutty trading on these four Fridays per year.
Which is our long-winded way of saying, trading was bound to be a little nutty today anyway. But the Fed’s apparently laissez-faire stance on interest rates, at least as vaguely expressed on Wednesday afternoon, made bulls determined to party today, and likely squeeze out a few more shorts too, just for fun, making this week a kind of stock market wedgie for the perma-bears. Maybe irrational exuberance is back in fashion. Today at least.
We’re standing back. Having been faked out a few many times in 2015 already, we’re wary of singing “Happy Days Are Here Again,” not only because we’re not sure they actually are. Worse, this little ditty has also been a “progressive” happy dance song since the sainted FDR took over from that rotten Herbert Hoover and saved America. We’re not happy dancing. Regular readers can guess the reason why.
Today’s trading tips
While we won’t make fools out of ourselves predicting how markets will end in March or at the end of 2015—like all the mega-rich stock peddlers do every day on CNBC—we will observe that on most Mondays this year, sellers have generally arrived in force. We’ll look at things over the weekend to see if it makes any sense to put our fairly high cash level back to work, having pruned investments back over the last three weeks or so. And if it does make sense, we’ll let you know where we think money might be made. (Or not.)
It’s always best to buy your merchandise when it’s being marked down, and Monday might just be one of those days if we’re persuaded to go bullish this weekend.
But in this bi-polar market, it doesn’t pay to move too quickly, as you can get whipsawed and lose money faster than you dumped it in.
So let’s resolve to enjoy a weekend we didn’t expect, do some financial weekend reading, and return refreshed, scrubbed and cynical on Monday and see if there’s anything that looks good in the Wall Street bargain bin.
As of Friday’s market close, the line-up of stocks in key market averages will change due to a variety of reasons ranging from significant changes in asset values to merger and acquisition action:
American Airlines (AAL) will replace Allergan (AGN) in the S&P 500 after the close of trading.
S&P 500 stocks Celgene (CELG), Kinder Morgan (KMI) and Actavis (ACT) will replace S&P 500 stocks Freeport-McMoRan (FCX), National Oilwell Varco (NOV) and Apache (APA) in the S&P 100.
S&P MidCap 400 stock Equinix (EQIX) will replace Denbury Resources (DNR) in the S&P 500, and DNR will replace EQIX in the S&P MidCap 400.
S&P MidCap 400 stock SL Green Realty (SLG) will replace Nabors Industries (NBR) in the S&P 500, and NBR will replace SLG in the S&P MidCap 40..
S&P MidCap 400 stock Hanesbrands (HBI) will replace Avon Products (AVP) in the S&P 500, and AVP will replace HBI in the S&P MidCap 400.