Mid-Month Update: End-of-Q1 Weakness Ahead
By: Christopher Mistal
March 15, 2016
From our Seasonal MACD Buy Signal on the close on October 5, 2015 through yesterday’s close, DJIA has advanced a modest 2.7% and S&P 500 was up 1.6%. However, NASDAQ was down 0.6%. These returns are well below average, but are a vast improvement since early-February. The rally since the February lows has been robust. DJIA, S&P 500 and NASDAQ have all reclaimed their respective 50-day moving averages, but are now struggling.  
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
All three indices paused at monthly resistance (red dashed line) last week. DJIA and S&P 500 have since broken through and are currently contending with their 200-day moving averages. NASDAQ is still stuck at monthly resistance. Stochastic, relative strength and MACD indicators are still all positive, but stretched toward overbought. If NASDAQ can break through resistance, it could provide the leadership for DJIA and S&P 500 to clear their 2000-day moving averages. Without NASDAQ moving higher, DJIA and S&P 500 are likely to stall and fade lower into the end-of-Q1.
Week After Triple Witching Option Expiration Week & Good Friday
In a post on our blog last week, we looked at the history of March’s Triple Witching options expiration week and the week after. Historically, this week has a bullish bias while next week has a bearish bias. Next week is also a shortened trading week due to Good Friday and Easter. From page 88 of Stock Trader’s Almanac 2016, the days before Good Friday are generally positive and in the table below you can see that the shortened week also has a bullish slant.
[Easter Week Stats Table]
This creates a conflict. Which tendency is more likely next week? Since 1983, the first year that Triple Witching options expiration occurred in March, this scenario has occurred just four times. In 2005, S&P 500 was up 0.13%, in 1997 it was down 2.06%, in 1989 up 2.04% and 1986 it dropped 4.30%. Based upon these occurrences, the S&P 500 leans bearish even when the week after March option expiration is also the week Good Friday lands in.  
Last Three or Four Trading Days
Further compounding the pain during the week after March options expiration in most years is end-of-quarter weakness. Over the past 26 years the DJIA and S&P 500 have declined 17 times and advanced 9 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]