[Market Madness] Edition 0067
Quadruple Witching and Rebalancing
Fun on a Friday
Well folks, happy Juneteenth and happy Friday. It is an important day in our history and should be remembered and celebrated as such, particularly in the current climate.
Here in the U.S., the day started in the green and we saw investors sell out of bonds, signaled by the U.S. 10-Year Treasury rate on the rise. By midday, we saw the major indices move into the red, in part due to news of Apple re-closing stores in high-spiking COVID 19 states. U.S.-wide COVID 19 cases have jumped 15% from one week ago, signalling a potential resurgence. Many states are beginning to face questioning regarding their reopening plans and how these rising case levels will interfere. With bank’s stress tests coming up, the Fed is going to be adding COVID 19-type scenarios into their testing. A lot is in play for these upcoming weeks.
Elsewhere, a Chinese index (CSI 300) has turned positive on the year, a change of pace for China as it looks to move past the pandemic period. Oil prices flirted above $40 per barrel this morning, rising hopes that the OPEC+ supply cut agreements may have provided some stability to the battered market.
Did you miss yesterdays’s piece? No worries! Get it right here and catch up on the madness.
Fundamentals
Friday Close:
Dow Jones Industrial Avg: -0.80%
S&P 500: -0.56%
NASDAQ: +0.03%
US 10 YR: 0.697%
Crude OIL: $39.57
Market Madness Portfolio: -0.09%
COVID 19 Global Cases: 8,701,118
Indices Overseas:
FTSE 100: +1.16%
Nikkei 225: +0.55%
Hang Seng: +0.73%
TEDRATE: 0.14
LIBOR (3 month): 0.30638%
Freaky Friday
Okay, this will get a little technical. I apologize in advance and will do my best to explain as simply as possible.
Today is an interesting day for the markets. The S&P 500 is going to do its first rebalance of the year, following delays earlier on due to the rising market instability we saw in the first quarter of the year.
“Index rebalancing has often been associated with an uptick in market volatility as index and exchange-traded funds tracking the S&P 500 have to adjust. S&P Dow Jones estimates that over $11.2 trillion in assets are indexed or benchmarked to the S&P 500.” (excerpted from article)
A rebalance is the process by which portfolios are realigned to match their destined weightings. This is done on a quarterly basis to keep original outlines on track from a risk perspective. This rebalance can be especially disturbing to volatility as it is making up for 2 quarters of trading, not just one. There will be changes to the overall allocation of the index, with the potential for some stocks to be removed as well.
“It’s also quadruple witching day, which often brings trading volatility as futures and stocks contracts expire and big players unwind their positions. Add that calendar quirk to a pandemic, a global recession, an army of newbie retail investors, and it should be a fun day.” -Bernhard Warner, Fortune.
A match made in heaven.
Another big deal today is the quadruple witching. This refers to the expiration single- and index-options and futures. This happens on the third Friday of March, June, September, and December (each quarter). Goldman Sachs estimates there is about $1.8 trillion in S&P 500 options that are set to expire today, which is one of the largest, non-December, expiration in history.
All this is to say that there may be some really interesting price action today. In tandem with all the other factors Bernhard mentioned in his quote above, we are likely to see a very unique combination of forces. Given how bouncy the markets have been, some are speculating this day could start another downward run.
On a macro-level, this rebalance and quadruple witching come at an interesting time. COVID 19 cases are rising, some global indices are turning green on the year, tensions are rising between India and China, and between North and South Korea. The economic factors are truly a mixed bag as well, with some signs of economic recovery and others showing continued economic stagnation. A lot hangs in the balance for everyone as eyes grow weary watching for signals of the economy we used to know.
Quick Takes
Apple reclosing stores in states where COVID 19 is spiking once more. (via CNBC)
COVID 19-type scenarios being added to this years bank stress testing by the Fed. (via CNBC)
WHO to hold a briefing today, highlighting concerns that COVID 19 spread is accelerating. (via ATOM+, headline only)
AMC to change decision, will now require theater attendees to wear face covering. (via CNBC)
Cruise lines voluntarily putting a pause on cruises departing out of U.S. ports until September 15. (via CNBC)
Reader’s Corner
The reader could not pass up an article titled: “Wall Street, bribery and an opioid epidemic: the inside story of a disgraced drugmaker.” Grab this interesting read here on the FT. Happy Juneteenth and Friday to everyone. Enjoy the weekend!
Behind the Madness
Thank you again for checking in.
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