With tomorrow's CDS roll (when indices change composition and on-the-run maturities are extended) and Friday's major equity option expiration and S&P index reweightings, it would appear, as UBS' Art Cashin notes, that the action of the last few days (and even last week) will be largely driven by the creation of complex strategies to "milk out every ounce of profit that might be available in such huge [technical] shifts." Combine this technical factor with the Autumnal Equinox, of W.D.Gann infamy, and the stage is set for fireworks as we approach Friday.
Via UBS' Art Cashin:
Pre-Expiration Shuffling May Have Bailed Out Final Hour – As we noted last week, Wall Street is abuzz with speculation about Friday's Expiration. Not only is it a quarterly but it will involve a rather massive reweighing of the S&P indices. At one point it was guesstimated that Coca-Cola might see 50 million for sale on the close.
With such large shifts possible, the Wall Street wizards naturally began setting up complicated strategies to milk out every ounce of profit that might be available in such huge shifts. Combinations of stock and options and futures and even ETFs are cobbled together to yield great reward as they are unraveled at the expiration.
The setting up of those strategies and combinations is done over the days leading up to the event. Wall Street watering holes say the process actually began last week.
That means that traders must weigh in a new consideration along with things like economics, monetary policy, geo-politics and corporate events. It makes the days leading up to the Expiration a bit more unpredictable than usual. We think it was a factor yesterday.
Revisiting Wall Street folklore and The Autumnal Equinox – In past years at this time, I have quoted my pal, Dennis Gartman’s citation of a piece on seasonality and late September by his good friend, Paul Macrea Montgomery. (Paul has become a bit of a legend over the years for his ability to dig out arcane or overlooked clues to the market – wish I could do that.) Anyway, here’s a bit of what I quoted last year:
The legendary trader W.D. Gann reportedly claimed that capital and commodity markets tend to top on or around September 22nd more oft than on any other day of the year. There is not apparent economic logic behind this reported observation, but the notion might very well have a certain appeal to astrologers, in as much as September 22nd happens to be the usual date of the Autumnal Equinox…the day that the earth crosses the Sun’s equator going south, and one of the two dates each year that the days and nights are of equal duration.
This is the day which, according to ancient lore, the Sun enters its “Fall,” thereby reversing for a time the rising animal spirits and other good things associated with Spring and Summer, and setting the stage for untoward events to unfold. Apparently this concept is so ancient it pre-dates even the oldest Mesopotamian culture.
Initially, we never took such notions seriously. This was despite the authority of W.D. Gann and even despite the research from the Department of Neuranatomy at Yale Medical School, which discovered that the human nervous system typically undergoes measurable perturbations during the late September time period (and in mid-March as well). However, subsequent to hearing of Gann’s proposed rule, and of Yale’s medical research, we have experienced firsthand the October Massacre of 1978; the October Massacre of 1987; the October Crashette of 1989; the 1997 Asian Collapse; the Long Term Capital rescue on September 23, 1998, etc. Also, remember the great Gold Boom of the 1970s, while bullion peaked on January 21, 1980, the Gold and Silver stocks made their all time bull market highs on September 22, 1980.
This day also saw the major peak of many oil stocks, which were enjoying a parallel bull market at the time. Also prior to the Great Crash of 1929, the last stock index to make its then all time peak… the Dow Jones Utility Average… did so on September 21, 1929. Even as far back as 1873, there was such a panic that the New York Stock Exchange voted, on September 21st to temporarily close its doors...
Besides stock market moves, numerous currency market moves also have keyed off this date. On September 21, 1931, for example, the British pound was devalued 28% overnight… from $4.84 to $3.50. Also, the now famous Plaza Accord of September 21, 1985, which started a dramatic run in currencies, occurred on the exact 54th anniversary of Britain’s leaving the gold standard. And recall a decade or so ago in 1992 when the French vote on the Maastricht European Exchange Rate Treaty was set for Sunday, September 20th. The British pound sterling collapsed a few days immediately previous to this vote… And finally, recall that the historic Gould-Fisk Gold Corner Panic” saw riot conditions as Gold peaked exactly on September 21st… the year was 1869.
As I have explained over the years, much of that seasonality was understandable prior to 1929. The U.S. was an agrarian society. To pay for crops, money would leave city banks for country banks. That often led to temporary liquidity squeezes in the city banks which sometimes produced financial crisis. Now we have a Federal Reserve system and we’re highly urbanized but the seasonality seems to linger. Anyway, thanks to Dennis and Paul.
That means this Friday's (September 21st) huge Expiration and reweighting are all the more important to watch.