12-18-2015 – Where is the market going?

Trading remained volatile through the Quad Witch Expiration Friday and, at the closing bell, the S&P 500 was down 24.60 points to 2017.31.  After a two-day 2.8% decline, the S&P 500 was essentially flat for the week, despite the three-day winning streak rally through the Fed rate announcement Wednesday. Falling crude oil prices have been a focal point during the latest decline, but Friday’s decline was possibly exacerbated by the witching expiration as well.

When the dust settled on the two-day sell-off, the S&P 500 was back in the red year-to-date and below both its 50-day and 200-day moving averages. CBOE Volatility Index (VIX), which dropped to an intraday low of 16.13 Thursday after Wednesday’s Fed meeting, is now north of 20 once again.  Trading volumes were picking up due to the volatility and the expiration. Indeed, trading in the options market reflected the bearish underlying tone, as put volume outpaced call activity. 9.7M calls and 10.3M puts traded. Total volume of 20M is nearly 50% more than the one-month daily average.

Sectors were lower across the board Friday led by a 2.5% decline in Financials (XLF). Consumer Staples (XLP) saw relatively weakness as well and a 2.2% drop in Apple (AAPL) weighed on the Tech (XLK) sector. However, no sector was left unscathed. Midcaps (MID) fell 1.2% along with the broader market. Small Caps (RUT) fared better and were down less than 1%.

Longer-term Treasurys have been well bid over the past two days despite the announced rate hike Wednesday. The yield on the benchmark ten-year is 2.2% and down from highs of 2.33% mid-week. Gold recouped some of Thursday’s big losses amid safe haven buying ahead of the weekend. The yellow metal was up $16 to $1065. Flight-to-safety seems to be giving both bonds and gold short-term bids.

Only two, holiday-abbreviated, weeks remain for the year and the momentum in the equities market has clearly turned negative. However, a big expiration for December options on the Quad Witch maybe exacerbated volatility a bit. If so, it will be corrected early next week and we can see if the Santa Claus rally unfolds into yearend. 2000 on the S&P 500 is obviously important support and, if that gives way, investors could find lumps of coals in their stockings rather than the Santa rally in 2015.