Market Entering Into a Difficult Seasonal Time Frame Starting with Tomorrow’s Triple Witching Expiration

New 52-week lows failed to expand again Thursday despite the market’s morning
plunge below Wednesday’s lows. That was one of the better intraday tells that
downside momentum wasn’t as strong as it appeared when looking at price alone.

With the market set to gap up 2%+ Friday morning, a couple of interesting
points to keep in mind. One, watch where S&P futures (or SPY) close relative
to the open. If the upside gap remains unfilled and the S&Ps settle below the
open, it would have short-term negative implications heading into early next
week. I’d also note that Friday is triple witching expiration, and should the
S&P settle with a gain of 1% or more, history suggests it may mark the end of
this short-term rally phase. In the table below is every instance over the
past two decades in which the S&P closed up 1% or more on Expiration Friday…

S&P500 +1.0% on Expiration Friday
04/18/08… S&P500 +0.5% one week later
03/20/08… S&P500 -1.1% one week later
12/21/07… S&P500 -1.1% one week later
08/17/07… S&P500 +2.3% one week later (*)
07/18/03… S&P500 +0.5% one week later
04/17/03… S&P500 +0.6% one week later
03/21/03… S&P500 -3.6% one week later
02/21/03… S&P500 -0.8% one week later
12/20/02… S&P500 -1.8% one week later
03/15/02… S&P500 -1.5% one week later
09/17/99… S&P500 -4.4% one week later
01/15/99… S&P500 -0.8% one week later
04/17/98… S&P500 -1.3% one week later
01/16/98… S&P500 -0.5% one week later
12/18/92… S&P500 -0.5% one week later
12/20/91… S&P500 +7.3% one week later (*)
02/15/91… S&P500 -0.5% one week later
01/18/91… S&P500 +1.2% one week later (*)
10/19/90… S&P500 -2.5% one week later
03/16/90… S&P500 -1.4% one week later
05/19/89… S&P500 +0.1% one week later
04/21/89… S&P500 +0.0% one week later
02/19/88… S&P500 +0.3% one week later
01/15/88… S&P500 -2.2% one week later

Note that the S&P was roughly twice as likely to trade lower the following
week. Out of 24 occurrences over the last two decades, only three saw the S&P
gain 1% or more the following week. The other twenty times saw the S&P trade
flat-to-down, suggesting a big move on Expiration Friday often means buying
power is at or near a short-term exhaustion point.

Seasonal studies also suggest limited upside potential from Friday’s close
through the end of the month. The reasoning is that September triple witching
often ushers in a challenging time for stocks through the end of the quarter.
The table below highlights the S&P500′s performance from the close on
September options expiration through the last trading day of September for
every year since 1978…

S&P Performance from Sep Expiry until End of Month
09/19/08 – 09/30/08… S&P500 ???
09/21/07 – 09/28/07… S&P500 +0.1%
09/15/06 – 09/29/06… S&P500 +1.2% (*)
09/16/05 – 09/30/05… S&P500 -0.7%
09/17/04 – 09/30/04… S&P500 -1.2%
09/19/03 – 09/30/03… S&P500 -3.8%
09/20/02 – 09/30/02… S&P500 -3.6%
09/21/01 – 09/28/01… S&P500 +7.8% (*)
09/15/00 – 09/29/00… S&P500 -2.0%
09/17/99 – 09/30/99… S&P500 -3.9%
09/18/98 – 09/30/98… S&P500 -0.3%
09/19/97 – 09/30/97… S&P500 -0.3%
09/20/96 – 09/30/96… S&P500 +0.1%
09/15/95 – 09/29/95… S&P500 +0.2%
09/16/94 – 09/30/94… S&P500 -1.8%
09/17/93 – 09/30/93… S&P500 +0.0%
09/18/92 – 09/30/92… S&P500 -1.2%
09/20/91 – 09/30/91… S&P500 -0.0%
09/21/90 – 09/28/90… S&P500 -1.7%
09/15/89 – 09/29/89… S&P500 +1.2% (*)
09/16/88 – 09/30/88… S&P500 +0.5%
09/18/87 – 09/30/87… S&P500 +2.2% (*)
09/19/86 – 09/30/86… S&P500 -0.4%
09/20/85 – 09/30/85… S&P500 +0.0%
09/21/84 – 09/28/84… S&P500 +0.2%
09/16/83 – 09/30/83… S&P500 -0.0%
09/17/82 – 09/30/82… S&P500 -1.7%
09/18/81 – 09/30/81… S&P500 -0.0%
09/19/80 – 09/30/80… S&P500 -2.9%
09/21/79 – 09/28/79… S&P500 -1.0%
09/15/78 – 09/29/78… S&P500 -1.5%

Note that in only four cases out of thirty did the S&P gain more than 0.5%,
which means that 87% of the time the S&P traded sideways to down from
September expiration through the end of the month. With the current rally
essentially fulfilling all of the bullish setups discussed in Wednesday
evening’s column, I wouldn’t be surprised to see the market follow seasonal
tendencies and trade in a generally choppy manner over the last seven trading
days of September.

Categories : Archived EOD Commentary, End-of-Day Commentary

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