Stock Market Gets Spooked On Quadruple-Witching Day

Halloween came to Wall Street a month early this year, as “quadruple-witching day” turned out to be horrible for the stock market. On “quadruple-witching” day, contracts expire for stock index options, stock index futures, individual stock futures, and individual stock options. Quadruple witching usually enhances stock market volatility and this low-volatility week ended with the Chicago Board Options Exchange Volatility Index (VIX), nearly escaping from the red until just before Friday’s closing bell.

The day was off to a bad start as another showdown over the debt ceiling in Washington raised fears of a government shutdown, putting investors in a risk-averse mood. More bad news came during lunch, when the usually-dovish St. Louis Federal Reserve President (and FOMC member) James Bullard warned us that the taper could actually begin in October. It will be interesting to see how “Octaper” fears impact the markets during the coming weeks.

In a speech before the New York Association for Business Economics, Bullard explained that the FOMC vote on the taper was close and the late data (likely the Consumer Price Index) tipped the balance against cutbacks to the Fed’s bond purchases. One of Bullard’s key points in explaining the rationale for delaying the taper was that the “main macroeconomic surprise in the U.S. since September 2012 has been a lower rate of inflation”.

The Dow Jones Industrial Average (DIA) lost 185 points to finish Friday’s trading session at 15,451 for a 1.19 percent decline. The S&P 500 (SPY) dropped 0.72 percent to close at 1,709.

The Nasdaq 100 (QQQ) fell 0.40 percent to finish at 3,224. The Russell 2000 (IWM) declined 0.23 percent to end the day at 1,072.

In other major markets, oil (USO) dropped 0.81 percent to close at $37.77.

On London’s ICE Futures Europe Exchange, November futures for Brent crude oil declined 53 cents (0.49 percent) to $109.29/bbl. (BNO).

December gold futures fell $43.10 (3.15 percent) to $1,326.20 per ounce (GLD).

Transports never made it out of the parking lot on Friday, with the Dow Jones Transportation Average (IYT) declining 0.45 percent.

In Japan, stocks made a slight dip after the yen strengthened to 99.18 per dollar during the last two hours of the trading day in Tokyo. The Nikkei 225 Stock Average declined 0.16 percent to 14,742 (EWJ).

In China, both the Shanghai Stock Exchange and the Hong Kong Stock Exchange were closed on Friday for the Mid-Autumn Festival (FXI, EWH).

In Europe, stocks made a slight retreat from Thursday’s post-FOMC rally, which pushed the Euro STOXX 50 Index to its highest closing level since May 11, 2011. Anxiety about Sunday’s elections in Germany kept investors in a risk-averse mood (VGK).

The Euro STOXX 50 Index finished Friday’s session with a 0.31 percent decline to 2,927 – remaining well above its 50-day moving average of 2,795. Its Relative Strength Index is 68.99 (FEZ).

Technical indicators revealed that the S&P 500 remained above its 50-day moving average of 1,678 despite finishing Friday’s session with a 0.72 percent decline to 1,709. Its Relative Strength Index fell from 70.18 to 63.02. The MACD continues to rise above the zero line and the signal line has crossed above the zero line, suggesting the likelihood of a further advance.

For Friday, all sectors finished solidly in negative territory. The utilities sector took the hardest hit, falling 1.49 percent.

Consumer Discretionary (XLY): -0.30%

Technology: (XLK): -0.70%

Industrials (XLI): -1.22%

Materials: (XLB): -1.15%

Energy (XLE): -0.80%

Financials: (XLF): -0.51%

Utilities (XLU): -1.49%

Health Care: (XLV): -0.17%

Consumer Staples (XLP): -0.68%

Bottom line: Investor anxiety was compounded by a warning from FOMC member James Bullard that the dreaded taper could begin next month, sending the major stock indices into the red on quadruple-witching day.

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