The Day After Quad Witching – Markets into the Ditch
By Robert Perrego, at 4:19 pm on June 22nd, 2009Friday saw a quadruple witching day for futures and options and the expected volatility of Friday seems to have been deferred into today. Quadruple witching is a day on which stock index futures, stock index options, stock options and single stock futures all expire. This ‘witching’, which is usually thought to create very volatile days, sometimes causes NO volatility as large market players seem to move stocks towards the strike prices at which most of these futures and options go out worthless.
Think about it this way, if you were a size player and you had written (sold) a boat load of puts on a stock to collect the premium, and this stock was starting to trade below the strike price, what would you do? Well, in order not to lose money on those puts you sold you could simply buy the stock all day long holding the price just above the strike price until the end of the day. At the end of this day the options expire and ‘go out’ worthless and you get to keep the put premiums that you collected.
Fast forward to the following Monday – i.e. today; Now you have to sell all that stock you bought protecting your put writing exposure and everything else you were protecting last Friday when the market barely moved and this results in…
Dow Jones Industrials down 200.72 (-2.35%, 8339.01), The S&P 500 was hit for 28.19 points (-3.06%, 893.04) and the Nasdaq down 29.17 (-2.00%, 1426.61).
Leading the market to the downside was once again the energy (-6.01%) and the financial sectors (-5.93%). This pattern of energy and financials leading to the downside should come as no surprise as these two sectors were top upside performers during the rally of the past few months. Traders and investors alike are selling and taking profits from this rally which is bringing a lot of long selling onto the market and hammering the indexes lower. Today EVERY sector traded lower showing traders liquidating positions across the board. Hello volatility!
Checking in on the bank stocks in the news on the way up and now on the way down; Goldman Sachs (NYSE: GS) -$6.12 (-4.3%, $137.01), Morgan Stanley (NYSE: MS) -$1.64 (-5.8%, $26.63), Citigroup (NYSE: C) -$0.17 (-5.4%, $3.00) and Bank of America (NYSE: BAC) -$1.28 (-9.68%, $11.94).
Since the market opened and people like me started writing commentary we have all been trying to connect the dots and give reasons as to why the market goes up or down each day. Fact is, there is always more than one reason (well, almost always) and into the mix today was the World Bank coming out and lowering GDP rates worldwide as well as lengthening their view of how long this recession is going to last. This worldwide decreasing view in economic activity caused oil to drop $2.62 a barrel closing at $66.93 as well as sparking a rout in the commodities pits around the horn. Gold dropped $12.20 and was trading at $921.50 at 4:09 pm.m est, copper was off 5.55%, and in the non-metals corn led the ’softs’ lower dropping 3.34%.
After the rapid rally off our March lows it seems the cacophony of commentators calling this a bull market rally in a secular bear market can be right today as the peak of two Thursday’s ago is further and further into the rear-view mirror and the market is now off 6.07% from the rally intra-day high trade of 8877.93.
Technically speaking the Dow traded down to, and closed below it’s 50 day exponential moving average which is at 8382 (Dow close 8339). This is a very closely watched moving average among the technical trading group with a Dow close below this level again tomorrow the technical traders will be selling their longs and getting short left and right. As far as other indicators go, the action seems to be to the downside with the index’s most recent up trend line now solidly broken and most the market oscillators pointing downwards.
On Tuesday we get housing numbers and same store sales as well as the beginning of a two day Fed meeting with their announcement expected Wednesday at 2:15 pm. With unemployment high and climbing no one expects the Fed to increase rates and, again, with unemployment numbers this high I would not expect any ‘green shoots’ in the economic numbers any time soon.
Witch into the Ditch and look out below!
