Market Commentary
Brian Stutland

Navigating Volatility: What You Need to Know Before the Opening Bell on June 16, 2023

Today marks a significant event in the financial world—Quadruple Witching Expiration Day. This day occurs only four times a year and involves the simultaneous expiration of stock options, stock index options, stock index futures, and single stock futures. Notably, this is the second largest Quadruple Witching Day since 2018, with a staggering $2 trillion notional dollars worth of options rolling off. As a result, we can expect a flurry of activity as speculators and market makers roll their positions due to the expiration of previous hedges.

So, what does this mean for today and the upcoming week?

Typically, Quadruple Witching Days bring extra volume and increased volatility to the market. Recently, there has been a rise in call buying, with notional call volume reaching record levels. Furthermore, historical data shows that the week following Quadruple Witching Days in June and September tends to be negative.

Contrarian Indicators

While the markets have been on an impressive run, fueled in part by the growing influence of artificial intelligence (AI), there are a few contrarian indicators that warrant our attention.  The Spikes Index , a key volatility sentiment metric measuring volatility in the SPY etf, hit a 52 week low. The Fear and Greed Index, a popular sentiment gauge, is currently showing extreme greed. Last week, we witnessed a 52-week high in bullish sentiment as Measured by the AAII investor survey , and this week it has reached another new high. Moreover, yesterday saw one of the highest call option trading volumes, suggesting investors are eagerly chasing this bull run.

It is important to keep an eye on all three of these indicators. While it is not unusual for them to remain in a positive range, it is worth noting that previous relative tops in stock indexes have coincided with peaks in call option volume, particularly when bullish sentiment is high and the Fear and Greed Index indicates extreme greed. This is not a recommendation to go heavily short in the market, but should these indicators start to reverse, we should pay close attention.

Terminal Rate

Another factor to consider is the Federal Reserve’s projected terminal rate of 5.6%, as indicated by the Fed dot plot. Interestingly, the market seems to be skeptical of the Fed’s forecast, given the prevailing sentiment.

As we navigate through today’s Quadruple Witching Expiration Day, it is crucial to be prepared for extra volume and heightened volatility. While the markets have been on a remarkable upswing, the presence of certain contrarian indicators and the market’s skepticism towards the Fed’s projections should give us pause. It is wise to stay vigilant and monitor these indicators closely as we move forward in this dynamic and ever-changing financial landscape.