What to Expect During Quadruple Witching/Fed Meeting Week

By: Gregory Clay | Sun, Mar 12, 2017
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Market Summary

The S&P 500 Says Happy 8th Birthday to the Bull Market. The bull is getting long in the tooth but is still strong since the driver is earnings instead of lower interest rates. The Fed is raising rates, but even if it raised three times this year, available interest income is still at an historically low range. In other words where do investors go, the balance of total returns still favors equities. The market ended flat last week. For the week, the S&P 500 Index and the Blue Chip-heavy Dow Jones Industrial Average were basically even declining .4% and .5% respectively. The Nasdaq snapped a string of six consecutive weekly gains falling .2% and the MidCap 400 dropped 1.64%, while the small cap Russell 2000 sank 2.07%. As seen in the chart below, since the presidential election the major stock indexes have been trending higher. Precious metals and bonds are down due to the adverse impact of probable higher interest rates from the Fed.

Performance since Nov 8

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the overall stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. In the updated chart below you can see how the upward move is stalling out. The price trend is moving sideways to absorb stocks overbought condition. Investors appear be waiting on stock prices to pull back a little so that they can step in and start bidding to drive the next market leg higher.

MTUM Daily Chart

In the chart below the DOW Transportation index ($TRAN) is has diverged lower from the Dow Jones Industrial Average ($INDU). We look for DOW Transports and Industrials to move in synch for confirmation of the current trend. Technically, whenever these indexes pull away from each other, it is considered a weakening trend. If the DOW Industrials follow the Transports lower that is considered a signal the upward move is losing steam.

Dow Industrials and Transports Daily Charts

A tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market "breadth" indicator used to gauge the internal strength/weakness of the market. Like many of the technical market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication. Nasdaq stocks have been leading the market direction for the past year. Whenever the Nasdaq index stocks falter the overall market usually stalls which is what currently appears to be the case. If the BPCOMPQ chart continues its current downtrend it might be difficult the major stock indexes to start making new highs again.

NASDAQ Composite Bullish Percent Index Daily Chart

In the chart below the dollar turned negative for the week, ending a four-week streak of gains for the buck, after the February payroll report came in stronger than expected, which was viewed as confirming consensus that the Federal Reserve would raise interest rates at its meeting next week. Gold settled lower Friday for a ninth session in a row as expectations that the Fed will raise rates. Treasury bonds notched their second straight weekly loss as expectations of higher interest rates next week rose to the level of near-certainty.

UUP, Gols and T-Bonds Daily Charts


Market Outlook

Sue Chang in MarketWatch wrote how as much as Julius Caesar's assassination on the Ides of March signaled an inflection point in Roman history, March 15 may also mark a watershed moment for the U.S. stock market with the Federal Reserve poised to seek closure to its loose monetary policy regime. "The coming week has the potential to be huge for trading opportunities," said Colin Cieszynski, chief market strategist at CMC Markets, in a note. "Everything centers around the Ides of March...with a number of key developments coming out both on [March] 15 and 16." The Fed's monetary policy decision on Wednesday will take center stage with markets nearly 100% certain of a rate increase following solid February jobs data. The focus will be on the Fed's statement rather than the decision itself. "The commentary will help determine how many more hikes the market has to get used to and then when it has to start preparing," said Bob Pavlik, chief market strategist at Boston Private Wealth. If the central bank strikes a hawkish tone, it could trigger a selloff in the market although Pavlik expects Fed Chairwoman Janet Yellen to keep her comments positive to avoid upsetting the market.

In a recent edition of Almanac Trader Jeff Hirsch how stock options, index options, index futures, and single-stock/ETF futures all expire at the same time four times each year, March, June, September and December. This event is often referred to as Quadruple Witching or as we prefer to call it in the, Triple Witching. Historically, the upcoming March option expiration week performance is second only to December's and is generally bullish. DJIA and S&P 500 have recorded weekly gains in roughly twice the number of weeks as there have been declines. NASDAQ's track record since 1983 is slightly softer with 21 advances and 13 declines, but all three indices have logged gains in options expiration week in eight of the last nine years. However, the week after tends to be bearish for DJIA and S&P 500. NASDAQ is mixed. You can see in the quarterly chart how gold has staged a dramatic recovery after the year-end crash. Nasdaq stocks are the top performer after being the market leader since early last year. As we suggested recently, look for the leaders to perform well to provide evidence of market strength.

YTD Performance

The CBOE Volatility Index (VIX) is known as the market's "fear gauge" because it tracks the expected volatility priced into short-term S&P 500 Index options. When stocks stumble, the uptick in volatility and the demand for index put options tends to drive up the price of options premiums and sends the VIX higher. In the chart below the Volatility Index remains stuck near its lowest level as investors remain complacent about any potential near-term market risk.

VIX Weekly Chart

The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result is for the week ending 03/08/2017. Pessimism among individual investors jumped to its highest level in more than year. At the same time, the percentages of individual investors describing their six-month outlooks as "bullish" or "neutral" fell. Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 7.9 percentage points to 30.0%. Optimism was last lower on November 2, 2016 (23.6%). The drop keeps bullish sentiment below its historical average of 38.5% for the seventh time in eight weeks. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 3.0 percentage points to 23.5%. This is a three-month low. It is also the third consecutive week with neutral sentiment below its historical average of 31.0%. Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 10.9 percentage points to 46.5%. Pessimism was last higher on February 10, 2016 (48.7%). The increase keeps bearish sentiment above its historical average of 30.5% for a fourth consecutive week and the seventh time in eight weeks. This week's big jump has occurred as both large-cap and small-cap stocks have pulled back from their recent highs.

AAII Sentiment

The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue bars depict a two-week moving average of the NAAIM managers' responses. As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The current survey result is for the week ending 03/8/2017. Fourth-quarter NAAIM exposure index averaged 84.15%. Last week the NAAIM exposure index was 102.07%, and the current week's exposure is 87.09%. Investors appeared to have played it safe by selling off some equities to cash in profits ahead of next week's Fed meeting.

NAAIM Exposure Percent


Trading Strategy

Many individual investors are concerned about stocks having rallied too far, too fast or high valuations. At the same time, the potential impact that President Trump could have on the domestic and global economy continues to cause uncertainty or concern among some investors, while encouraging others. It's also possible that the recent increase in expectations for a rate hike at next week's Federal Reserve meeting could have dampened some individual investors' moods, even though many have been frustrated by the ongoing low interest rate environment. The biotech, healthcare, tech and financial sectors are leading the equity market higher in 2017. Biotech and tech are considered risk-on sectors offering the highest growth rates and the highest beta. Additionally, financials would be the biggest beneficiaries of a rising and steepening yield curve, given that banks borrow short and lend long. Simply put, this means that as the spread between short-dated and long-dated bonds widen, the banks make more money.

S&P Sector ETF 30-Day Performance

Feel free to contact me with questions,

 


 

Gregory Clay

Author: Gregory Clay

Gregory Clay,
http://www.theoptionplayer.com/

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