Political Calculations: The S&P 500 Survives Quadruple Witching, But What Next?

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18 March 2019

The S&P 500 Survives Quadruple Witching, But What Next?

The S&P 500 (Index: SPX) survived last week's quadruple witching on Friday, 15 March 2019. The last time the S&P 500 was at such a height was back on 9 October 2018, shortly after the market peaked at its record high closing value of 2,930.75 on 20 September 2018, just ahead of another quadruple witching day.

Now the big question becomes "how long might that last?" After all, the quadruple witching event on Friday, 15 March 2019 means that the dividend futures contracts for 2019-Q1 have now expired, which puts 2019-Q1 in the rear view mirror, at least as far as its dividend futures are concerned, which was the principal assumption behind the redzone forecast we added to our spaghetti forecast chart for the S&P 500 earlier this quarter.

Alternative Futures - S&P 500 - 2019Q1 - Standard Model with Annotated Redzone Forecast - Snapshot on 15 Mar 2019

With the current level of the S&P 500 right at the upper edge of our redzone forecast, its current level is currently consistent with the last two of the four possibilities that we outlined in our last edition.

Investors might focus their attention to the even more distant future of 2020-Q1, in which we would still see the S&P 500 decline from its current levels, but more on the order of 3-5%.

As if the way stock prices work wasn't already complex enough, the fourth option would be if investors split their attention between two different points of time in the future. In which case, we would expect to see stock prices fall in between the levels we described above, but would be weighted toward whichever future quarter has more strongly captured their attention.

In that last scenario, through 15 March 2019, the level of the S&P 500 would suggest that investors are splitting their forward-looking attention between 2019-Q2 and 2019-Q3, with a slightly heavier weighting toward the more distant future quarter.

Remember, it wasn't long after the S&P 500 reached its all-time high closing value on 20 September 2018 that our dividend futures-based model indicated that investors suddenly began shifting their attention from 2019-Q1 toward 2019-Q3, forcing the market into the early stages of what would become a correction.

2019-Q3 has become relevant for investors once again because if the Fed might consider hiking interest rates during 2019, they will most likely do so during this future quarter according to a recent Reuters poll. Should investors have reason to more fully focus their attention on this future quarter, the S&P 500 would be in for a rougher ride, as we also outlined in our previous edition:

Investors may shift their attention toward the more distant future of 2019-Q3 or 2019-Q4. The expectations for the change in the rate of dividend growth in both quarters are similar, but unfortunately, following 2019-Q2, that growth is projected to sharply decelerate, which is an expectation that has been in the cards (or rather, in the futures), since mid-2018. If investors focus their attention in these quarters, the S&P 500 can be expected to experience a correction, falling by 10% or more.

The Federal Reserve's Open Market Committee will meet later this week, where we will soon have a better idea of what they are thinking. In the meantime, let's catch up with the major market-moving market headlines since our last edition....

Friday, 8 March 2019