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S&P 500 Risking a Pullback in the Week Ahead

S&P 500 Analysis and News

  • Quadruple Witching Keeping Equities Static as Volatility Picks Up
  • Seasonals and Risk Barometers Points to Pullback

Over the past 24-48hrs, market volatility has at last picked up (thank you Fed), USD shorts are feeling the squeeze as popular reflation trades take a hit, while the precious metals complex had also come under heavy pressure. That being said, interestingly, this has not spread to the equity space with US equities remaining relatively stable. The Nasdaq 100 even rose to a fresh record high as US yields dropped to pre-FOMC levels as the 10yr trades south of 1.5% again. The somewhat surprisingly steady nature in equity markets could possibly be explained by quadruple witching, which happens on the 3rd Friday of every quarter (March, June, September, December).

During quadruple witching days, single stock option & futures, index futures & options expire. Typically, on these days, the simultaneous expiration can result in large volumes, raising the risk of abnormal price action. As I noted above, equities have been somewhat stable, one of the effects of quadruple witching is that security prices can be pinned to a certain strike price at expiration.

Now once quadruple witching is out of the way, there is a risk that equity markets may begin to soften, perhaps a delayed reaction to the FOMC’s hawkish twist. Keep in mind that we are also heading into a seasonally weak period for the equity space. Looking a seasonal chart, dating back to 2009, the S&P 500 tends to soften in the second half of the month.

S&P 500 Seasonals Signal Softer Prices From Here

Source: Refinitiv

Risk Barometer Edging Lower

Another indicator I watch for risk sentiment is the cyclical vs defensive risk barometer, which in recent sessions has been edging lower while the S&P 500 has remained stable. A sign that may suggest some froth needs to come off for risk sentiment.

Risk Barometer Points to Lower S&P 500

S&P 500 Risking a Pullback in the Week Ahead

Source: Refinitv

S&P 500 Levels to Watch

S&P 500 Risking a Pullback in the Week Ahead

Source: Refinitiv

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