Mid-Month Update: End-of-Q1 Often Treacherous
By: Christopher Mistal
March 12, 2015
Late last month, we noted March’s historical tendency towards increased volatility. On its historically bullish first trading day, March did deliver as the DJIA and S&P 500 soared to fresh all-time highs and NASDAQ closed over 5000 for the first time in nearly 15 years. Since then, the market has struggled as incoming economic data has been firm enough to fan the fears of interest rate hikes sooner, rather than later. The prospect of higher interest rates here in the U.S. and the ECB commencing QE have caused the U.S. dollar to soar to its highest level in over a decade. The surging U.S. dollar is in turn pressuring commodity prices and earnings estimates for large multi-national corporations. The net effect has driven DJIA and S&P 500 below December’s highs and their respective 50-day moving averages. NASDAQ has fared better, but still has given back roughly half of its gains since breaking out in mid-February.

[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]

The market’s recent weakness has done some technical damage. Stochastic, relative strength and MACD indicators are all negative. DJIA and S&P 500 are once again negative (or near) year-to-date. Their breakouts have failed. NASDAQ is a bright spot though. It has held its 50-day moving average and the breakout thus far. The next key level of support for DJIA and S&P 500 is their 200-day moving averages. For DJIA this is just slightly more than 17,250 and S&P 500 is 2002 as of today. 

Bullish Cluster & Triple Witching Option Expiration Week

Next week is options expiration week. March is the first time of the year when stock options, index options, index futures, and single-stock/ETF futures all expire at the same time. This event is often referred to as Quadruple Witching or as we prefer to call it in the Stock Trader’s Almanac (page 78), Triple Witching. Other Triple Witching months include June, September and December. Besides being the first Triple Witching event of 2015, next week is also unique as it hosts a three-consecutive-day bullish cluster on March 16 through the 18. This cluster is frequently responsible for respectable gains during options expiration week.

[March’s Bullish Cluster]

March’s option expiration week performance is second only to December’s and has a clearly bullish bias. DJIA and S&P 500 have recorded weekly gains in nearly twice the number of weeks as there have been declines. NASDAQ’s track record since 1983 is slightly softer with 19 advances and 13 declines. However, the week after tends to be bearish for DJIA and S&P 500 with declines easily outnumbering advances. NASDAQ is mixed.

[DJIA, S&P 500 & NASDAQ March Option Expiration Performance since 1983]

Last Three or Four Trading Days

Further compounding the pain during the week after March options expiration is end-of-quarter weakness. Over the past 25 years the DJIA and S&P 500 have declined 17 times and advanced 8 with an average loss approaching 1.0% near the end of March. Excluding advancing years, the average decline is right around 1.6% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third.

[Last Three or Four DJIA Trading Days in March]
[Last Three or Four S&P 500 Trading Days in March]

As you can see, the second half of March has the potential to cause pain. However, the market has proven especially resilient in recent months. Plunging crude oil and a surging dollar have not ended the fourth longest bull market in history. The U.S. is still one of the healthiest developed markets out there. Any second-half March weakness would likely reset previously stretched sentiment and technical indicators, paving the path to additional new all-time highs in April, the top-performing DJIA month since 1950 and the last month of the “Best Six Months,” as the market makes its way toward our projected first-half highs around DJIA 19000, S&P 500 2250 and NASDAQ 5000 (either side of its previous all-time high).