Last week had it all. Anxiety about escalating tensions over Crimea, uncertainty about the economic impact of the frigid winter and China’s slowing economy, a little gaffe from the new Fed chair, plus “quadruple witching” contract expiration, all of which caused momentary spikes in market volatility. And yet, the net effect? The S&P 500 continued to climb the proverbial “wall of worry” to all-time highs.
Now, don’t get caught flat-footed amid end-of-quarter position squaring but most signs point to a first quarter wrapping up in relatively quiet fashion. Collective exhale.
Ad-Libbed Flub?
It was a memorable start to Janet Yellen’s tenure. In the post-meeting press conference Wednesday, the newly appointed Fed head suggested that officials might hike the target fed funds rate “about six months” after the retirement of quantitative easing (QE), a faster timeline than the market had expected.
The remark sparked a selloff in Treasury bonds and the yield on the benchmark 10-year note approached a two-month high of 2.8%. The narrowing of the 5-year/30-year yield spread, which had already tightened a dramatic 20 basis points in two weeks, will remain in focus as traders adjust to the next chapter in Fed policy changes.
Fed reaction was widespread of course. The dollar strengthened and gold prices tumbled. Meanwhile, the S&P 500 dropped 11.5 points and the CBOE Volatility Index (VIX), the market’s fear gauge, rose to 15.95 (figure 1). The selloff was short-lived, however, when upbeat manufacturing and housing data on Thursday delivered economic evidence that softened the Yellen sting. By Friday, the S&P was again notching all-time highs and VIX dipped back below 14.
Teaching Moment
A solid finish does not mean an absence of volatility. Last week offered an education to those who do not heed sage advice: covering unnecessary risk on expiration days. Last week brought “quadruple witching” expiration of futures, options on futures, equity options and index options. It happens four times a year, in March, June, September, and December. These weeks are typically volatile as investors unwind or roll their expiring positions. Last week lived up to that. For instance on Friday morning, the S&P 500 (SPX) jumped 31 points intraday as options on the cash index were expiring that week. But the SPX, and most major stock indices, actually closed near the lows of the day. It marked quite an intra-day swing for a marketplace that had settled into a little post-Fed snooze.
So remember, calling the upcoming week-plus “quiet” does not mean it will be completely void of news or intraday action. Fed speakers hit the road. And on the economic front, key reports include durable goods Wednesday and GDP on Thursday (see the full calendar below). We still have the Ukraine situation to watch. President Obama holds high-level meetings in Europe. And Turkey conducts general elections next weekend.
The earnings calendar is light again this week. A handful of second-tier retailer earnings --- Gamestop (GME), Lululemon Athletica (LULU), and Fred’s (FRED) --- are due to report Thursday. Finish Line (FINL) and Blackberry (BBRY) are expected to report Friday morning.
Of note, it’s the final full week of Q1. With a handful of bellwethers --- FedEx (FDX), Oracle (ORCL), and Nike (NKE) --- suffering post-earnings losses late last week, the emphasis on warnings is renewed. Profit numbers will certainly be scrutinized in coming months in order to gauge whether or not continued new index highs are justified. Until then, keep an eye on bond yields. The trends will shape expectations for Q2.
And, good luck with what’s left of your shredded brackets!
Good trading,
JJ
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