Quadruple Witching This Friday

I plan to be out of the office skiing on Friday, so ahead of that day, I will position my trading account and portfolio accordingly this week.

As many of you are aware, Quadruple Witching occurs when stock options, index options, index futures, and single stock futures all expire on the same day.

Oodles of fun. 

Weeks like this can often be, shall we say, volatile? But hey, we’re used to it! Case in point: so far this year, out of the 48 trading days,  31 have produced moves of + or – 1% in the Dow and the S&P 500. And, 21 out of the 31 “volatile” days in the market this year have been to the downside. (Do you sense a theme here?)

In all, 64.50% of the trading days this year have seen swings of + or – 1% in the major market indexes. And seeing as this week is Quadruple Witching, it is not likely to be any different.

The largest decline for  a week like this was 6.72% in March 2001, when it used to be called Triple Witching (before the introduction of single stock futures). The largest gain for a week like this was in March 2003, in which was the S&P up 7.50%. That week marked an important turning point in the indicators. On March 17th 2003 the short term indicators began to reverse up from low levels and the NYSE Bullish Percent followed eventually followed on April 2nd. This was also shortly before relative strength switched over to favor stocks vs. bonds. That trend of favoring stocks  lasted until November 2007.

Interestingly enough, research from Dorsey Wright shows that in March 2004 and March 2005, the week around Triple Witching was also a pivotal point in the markets with the NYSE Bullish Percent reversing down into O’s on March 16th 2004 and into O’s on March 23rd 2005. In 2007, we went into Quadruple Witching Week with all of the major Bullish Percents in O’s and Quadruple Witching week for that year (2007) was down 1.13%. Last year, Quadruple Witching finished the week on a positive note, up 3.61%. This year, we enter Quadruple Witching week having just seen the NYSE Bullish Percent, S&P 500 Bullish, and Nasdaq 100 Bullish Percent all reverse back into a column of X’s.

One strategy for quadruple witching is if you want to buy stock, put the order in a couple of points below the market. If you want to sell stock, enter the order for a couple of points above the market. You may get executed on both your buy and sell tickets, as the market gyrates to your limit order. 

Any rallies in stocks that have given sell signals or have weakened, give you an opportunity to sell and raise cash or hedge those positions in some manner. Trade management is especially important in this market (when isn’t it?).

We have seen the first positive signs for this market in a long time , after last weeks four-day run. This all coming at a time when all of the major market indices remain oversold.

And while cash and fixed income remain in favor over the equity markets at this time, the Dow and S&P 500 have both given near term buy signals off a recent bottom. So, as this market continues to search for a bottom you can use the volatility to your advantage by selling your laggard stocks or funds on a rally, and using pullbacks as an opportunity to enter new positions, if you so dare.

Trade what is, in front of you, but if you’re like me, keep an eye on down the road. We’re not out of this mess by any means.

1. Thou shalt heed this one fact: the future is uncertain.
2. Thou shalt protect capital first; only then shalt thou seek a return on that capital.
3. Honor thy stops; do not deviate from your risk management principles.
4. Remember that the trend is your friend, until it isn’t.
5. Thou shalt not follow the crowd. Contrarians eventually are rewarded.
6. Thou shalt not marry a stock. It does not love you. Why should you spend your emotional capital on it? If it betrays you, trample it under your feet.
7. Thou shalt not steal cash from your credit card account to fund your trading account. It is an abomination.
8. Do not be quick to chase returns, for in that day, your account shall surely die.
9. Add not to a losing position, unless you are willing to lose the entire sum thereof to a money changer.
10. Thou shalt not be greedy. Take profits, walk away and do not look back; neither shall you beat yourself up over losses. Move on.

(Thanks to AAtlantis for requesting a post of this nature)

The last time we had four days in a row where the market went up was late November. The week ahead looks like an interesting set up for the bulls, in that Monday and Tuesday are critical.

If we don’t move above 790 on the S&P by Tuesday’s close, I think we’re in danger of reversing the current upward course.

The market is in an area of resistance from 745 – 780. If it can move through this area with strength and volume, there’s a good chance we’ll see an 8 handle on the S&P. However, time is of the essence.

As you can see from the Point & Figure chart above, there is heavy resistance at 815 all the way up to about 845. The current price objective for the S&P is 930, but there’s a lot of overhead supply to meet before it gets there. In addition, the 50 day moving average (MA)  is at 812. Assuming the market gets to this point, this is the area where I would expect to see failure and a major reversal, which would resume the long term bearish trend. On top of all this, future areas of major resistance are the Bearish Resistance Line at 880, and the 200 day MA at 1046. Indeed, it is tough sledding uphill for the market.

Although I’ve nibbled on SH, SKF and SRS recently, they’ve only been small positions (less than 1% of account equity per position). Since we never really know for sure where and when the market will turn, I’ve started easing into short positions via these inverse ETFs and will continue to do so on days where we have large percentage gains on the indices. The major trend is still down, and that is still the high percentage bet right now. That much I  do know.

I’m bearish for the long term, but there is some opportunity  to play the long side with a small amount of money, by bottom fishing those stocks and sectors that have been beaten severely and are showing signs of recovery.

I’m focusing on the oils, oil service, and wall street banks and brokers. Ag chemicals also look interesting, as do semiconductors, software and internet.

Here is my current list of candidates, assuming the rally continues:

Energy: Apache (APA), Canadian Oil Sands Trust (COSWF), Denbury Resources (DNR), Hess Corp (HES), Imperial Oil (IMO), Lukoil (LUKOY), Murphy Oil (MUR), Noble Affiliates (NBL), Newfield Exploration (NFX), Petro Bras (PBR), Total Fina (TOT)…..(read more in The PPT)

In the midst of all the celebration of the past three days, allow me to throw out this thought:

It’s nice to have a positive outlook on life. Lord, knows we need it, lest we fall into the depths of despair. However, when it comes to the market, we need to be objective and carefully think through the possible outcomes and scenarios, keeping our emotions in check.

Here’s one that is quite sobering:….If we follow the path of the GD (Great Depression), we may see Dow 1,500. Do the math.

Remember? From the peak in 1929 to the bottom of the Depression saw the Dow sink 89%.

Of course, that’s simply impossible in this day and age. Right? Perish the thought.

You may now continue the celebratory festivities, as you milk this rally.

(Disclaimer: these comments are the views of the author and not necessarily those of IBC, it’s owners, or employees.)

Ok, you giddy-yuppies, wipe those smiles off your faces. Just because the market is melting up today, doesn’t guarantee that capitalism is breaking out all over the world. Your profits are still on paper, no? Until you’re liable for the taxes, the money is not yours. So sorry to break that bad news to you.

Time to use this day as an opportunity to nibble on the short side now. It doesn’t have to be a colossal amount. Just get a small position on the books. Sell some stuff and take the profits and get short with some of it. Savor the elitism of being contrarian on a day like today.

Get SKF, SRS, SDS, etc. back on the radar. Start preparing for the next move down. Like The Fly said, America is Doomed. So is Europe. Protectionism is contagious.

The big play yet to come is shorting Europe, the Euro, and the breakup of the EU.

Not only do they have a hard time understanding each other, those idiots hate each other anyway.

“We are the world”……Uh, no.

(Disclaimer: the previous note is not meant to be investment advice for the internets. I’m merely jotting down  some of my thoughts)

When you start digging into the sentiment numbers, you’ll find that the NYSE Bullish Percent Index increased about 2% today. But the current reading is still in oversold territory at 17%. (“normal” market activity is usually found between 30% and 70%).

What’s even more telling is that the NYSE Hi-Lo Index is 0.80%. Let me say that again, phonetically: ZEE-ROW POYNT ATE PER-SENT. Simply put, there are over 99 times more stocks making new lows than new highs. Nasdaq? Same thing. The OTC Hi-Lo is also 0.80%.

0.80%

Folks, would you agree with me that this condition in the market might possibly be somewhat of an extreme? Perhaps, just a tad? Uh, yeah.

While it is possible for things to be like this for a period of time, the current situation suggests that buying at these levels  puts an immutable law on your side: the law of averages and reversion to the mean. The odds are on your side, my friends.

Time is on your side.