The S&P 500 Survives Quadruple Witching, But What Next?
The S&P 500 (Index: SPX) survived last week’s quadruple witching on Friday, 15 March 2019. The last time the S&P 500 was at such a height was back on 9 October 2018, shortly after the market peaked at its record high closing value of 2,930.75 on 20 September 2018, just ahead of another quadruple witching day.
Now the big question becomes “how long might that last?” After all, the quadruple witching event on Friday, 15 March 2019 means that the dividend futures contracts for 2019-Q1 have now expired, which puts 2019-Q1 in the rear view mirror, at least as far as its dividend futures are concerned, which was the principal assumption behind the redzone forecast we added to our spaghetti forecast chart for the S&P 500 earlier this quarter.
With the current level of the S&P 500 right at the upper edge of our redzone forecast, its current level is currently consistent with the last two of the four possibilities that we outlined in our last edition.
- Investors might focus their attention to the even more distant future of 2020-Q1, in which we would still see the S&P 500 decline from its current levels, but more on the order of 3-5%.
- As if the way stock prices work wasn’t already complex enough, the fourth option would be if investors split their attention between two different points of time in the future. In which case, we would expect to see stock prices fall in between the levels we described above, but would be weighted toward whichever future quarter has more strongly captured their attention.
In that last scenario, through 15 March 2019, the level of the S&P 500 would suggest that investors are splitting their forward-looking attention between 2019-Q2 and 2019-Q3, with a slightly heavier weighting toward the more distant future quarter.
Remember, it wasn’t long after the S&P 500 reached its all-time high closing value on 20 September 2018 that our dividend futures-based model indicated that investors suddenly began shifting their attention from 2019-Q1 toward 2019-Q3, forcing the market into the early stages of what would become a correction.
2019-Q3 has become relevant for investors once again because if the Fed might consider hiking interest rates during 2019, they will most likely do so during this future quarter according to a recent Reuters poll. Should investors have reason to more fully focus their attention on this future quarter, the S&P 500 would be in for a rougher ride, as we also outlined in our previous edition:
- Investors may shift their attention toward the more distant future of 2019-Q3 or 2019-Q4. The expectations for the change in the rate of dividend growth in both quarters are similar, but unfortunately, following 2019-Q2, that growth is projected to sharply decelerate, which is an expectation that has been in the cards (or rather, in the futures), since mid-2018. If investors focus their attention in these quarters, the S&P 500 can be expected to experience a correction, falling by 10% or more.
The Federal Reserve’s Open Market Committee will meet later this week, where we will soon have a better idea of what they are thinking. In the meantime, let’s catch up with the major market-moving market headlines since our last edition….
- Friday, 8 March 2019
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- Oil drops 1 percent as economic outlook weakens, U.S. supply surges
- China February exports tumble the most in three years, spur fears of ‘trade recession’
- China February soybean imports fall to four-year low amid tariffs, flat demand
- China’s iron ore imports hit 10-month low in February on holiday break
- China’s February coal imports tumble on uncertainty over curbs, holiday disruption
- China’s February crude imports surge 22 percent; gas imports drop from January
- German industrial orders post strongest drop in seven months
- Fed’s Powell says no immediate policy responses needed to economy
- Wall Street extends losing streak after weak U.S. jobs data
- Monday, 11 March 2019
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- Oil gains over 1 percent as Saudi stands by OPEC output cuts
- Bigger trouble developing in China:
- China auto sales fall 14 percent in February, mark eighth month of decline
- China hog prices hit 14-month high as African swine fever slashes output
- ‘Zombie’ enterprises hampering China’s economic transformation: Chinalco
- Bigger stimulus developing in China: China central bank pledges more policy support as bank lending slides
- U.S. inflation forecasts decline, supporting rate-hike holiday
- Wall Street snaps five-day losing streak despite Boeing’s drop
- Tuesday, 12 March 2019
- Wednesday, 13 March 2019
- Thursday, 14 March 2019
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- Oil wavers as OPEC pushes supply cut need, demand fears weigh
- China and U.S. to push back Trump-Xi summit to at least April: Bloomberg
- Trump says he is in no rush to complete China trade deal
- China industrial output growth falls to 17-year low, more support steps expected
- China makes major U.S. pork purchase despite steep import tariffs, as hog virus takes toll
- Finally some stimulus traction? China Jan-Feb steel output rises from December on strong margins
- S&P 500 eases amid U.S.-China trade uncertainty
- Friday, 15 March 2019
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- U.S. oil retreats from 2019 high on soaring production
- Bigger stimulus developing in China:
- China’s premier says ready to use more policy tools to help economy
- China to lower funding costs for small and micro firms by 1 percent point this year: premier
- Wall Street gains with tech; S&P 500 posts best week since November
We’re posting this edition of our S&P 500 chaos series ahead of our usual schedule, which means we’re missing linking Barry Ritholtz’ latest succinct summary of major market and economic events for the first week of March 2019. Look for it late Friday at this link!
Source: https://politicalcalculations.blogspot.com/2019/03/the-s-500-survives-quadruple-witching.html
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