Market Summary
The stock market was hit hard with a third straight week of
losses as investors reacted to a steep drop in oil prices and a jump in the
value of the dollar. Utilities, companies that make basic materials like steel
and major exporters had the biggest declines. The drop-off came at the end of a
volatile week and sets the stage for a Federal Reserve policy meeting next
week. Investors will be watching closely for clues about the central bank's
views on the economy and interest rates.
Volatility may increase at the end of the week due to
quadruple witching day, which is the expiration date of various stock index
futures, stock index options, stock options and single stock futures. All stock
options contracts expire on the third Friday of each month and once every
quarter - on the third Friday of March, June, September and December - all four
asset classes expire on the same day. Because futures and options investors
must close out of their positions on those days, they often witness increased trading
volume. The term "witching" comes from the fact that in the past, the
expiration of futures and options contracts occurred not only on the same day,
but also at the same time. This often resulted in a period of
greater-than-normal market volatility, which became known as the "witching
hour." Due to this increased volatility and frenzied market activity, many
investors approach the markets differently on witching days.
So far in the first quarter of the year, investors have
developed an appetite for riskier stocks. As evidenced in the graph below,
Russell 2000, Nasdaq and MidCap 400 are far and away the leading indexes for
the quarter. Market pundits are debating how soon the U.S. Federal Reserve will
start raising interest rates; rate sensitive asset classes are going
underwater.
Investment Analysis
The graphic below confirms the fact that money managers have
been dumping stocks in droves the past week. Healthcare is the only S&P
sector that is above water over the past month. After a short countertrend
bounce energy stocks got pounded back down to remain the worst performing
group. Stocks that pay higher dividends, such as utilities, also had big
losses. Be very careful with trading next week and it is prudent to enforce
tight stops on open positions. Don’t be surprised if volatility soars higher next
week as a reaction to the Federal Reserve meeting and announcement, plus there
is quadruple witching at week’s end.
By Gregory Clay
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