TRIPLE WITCHING MARKET IMPACT
One of the big things that people don’t follow too much that could be one of the big reasons the market was down so much yesterday was that coming up next Friday we have what’s called a “triple witching” in the market.
It’s when futures expire as they do every month, options expire and the options on futures expire all on the same day. There’s a lot of big activity going on in derivatives, which is a multi-trillion-dollar industry. A lot of people buy futures and sell futures all the time. Same with options.
That can have a big impact on the price of big indices like the S&P 500, as well as bigger stocks like Apple and Microsoft in the S&P 500. When a lot of people have a lot of futures contracts and options contracts outstanding, they are betting on the stock market being on a certain price by expiration.
When you have the market go up like it has so far after the past couple weeks up until yesterday, people are ready to take profits. When you have all those people selling the futures and selling their options, it can really drive things down.
Just like when you have people buying into those things it can drive things up very quickly. A lot of big institutions use futures to hedge their positions. They could have huge, multi-million-dollar positions in this that they clear out all at one time.
The S&P 500 futures for example is the most traded asset in the entire stock market. It’s a really popular thing people buy. A bunch of people just happened to sell it ahead of this triple witching date, which is the third Friday on the last month of each quarter. It happens in March, June, September and December.
We’re always looking for big moves around this time because it’s not uncommon that you get a lot of people buying or selling their big futures positions to roll ahead and buy whatever the next expiration is they want to buy, which is probably September.
One of the ways you can get a lot of money into the market is to buy into futures contracts. Then you would sell the futures contract as you built exposure in the stocks you wanted.
There’s a very natural dynamic there. Also, if you wanted big exposure in any single stock, the option markets are a way to get in. All of that must be balanced out at the end of every quarter. People’s books are marked, for sure, daily. However, the quarter end matters because many companies must report publicly.
That puts pressure on people to close positions out. As you said, there is the time pressure. People say, “I’m going to take my profit now. I’m not going to wait until next Friday.” No one is going to wait until the last day or the day before.
We’ve seen this before or after any big move. There’s always counter volatility relative to the direction driven by this triple witching action. Given the size of the move and the violence of the move, it’s something that was in the cards one day or the other.
THE MAIN STREET AMERICA STOCK MARKET
In five to seven years, the entire Dow is going to be remade. That’s clear because half these countries are going to be shrunken. Some of them will have merged because of weakness. A few will have gone out of business.
Going back to the year 2000, General Electric was the highest market-cap company in the 1999-2000 bull market. And today, the company’s stock is way down.
At the top of the 2007 market, another top company in the Dow in terms of market capitalization was Exxon. Another company that is way down today.
We’re in a period of even more change. There is a definitive fracture between America 1.0 and America 2.0. This whole crisis period has made that very clear.
A lot of those companies that are being disrupted are still worth hundreds of billions of dollars, which is just foddered to feed the smaller companies. When people sell out of the ones being disrupted, over time they end up buying the ones that are disrupting. They end up taking that market share.
It’s also going to take the market cap of those companies. You have a few companies worth $100 billion to $200 billion and all these other companies that are growing like crazy disrupting them that are worth $5 billion to $10 billion. Those are going to even out over time.
There’s an enormous shifting of market capitalization going on right now from America 1.0 to America 2.0. This is a market that the big money can’t play because some of these companies are so small.
They have so much money they have to wait until Main Street investors. They can come with their billions and participate. However, for the next three years to five years, this is a Main Street market.
This is for small investors, regular investors, mom-and-pop investors — whatever you want to call us. Main Street America, this is for you. These companies are so small, for the most part the big money cannot play.
Smaller stocks at $5 billion or less in market cap trade maybe $10 million to $20 million a day at most. If you are a big hedge fund and you have billions of dollars and want to put $10 million into a stock, you have to either wait or spread it out in really small amounts.
You will see the buying effect over time, but if they tried to buy in all at once it would make the stock go up 100% in a day.
It’s part of the pouring down effect. In other words, many of the companies our readers have known for many years are slowly going to start to become multiple-billion-dollar companies. At that point in time, the big-money investors can finally start to put 1% or 2% into it. As they come, they will bid it up even higher.
We have stayed bullish, optimistic, positive through what was a brutal crash. However, the underpinnings of the America 2.0 bull market never changed.
Companies that are disrupting are starting to come public, but a lot of the really disruptive companies are still private. This is going to feed the market even more as these important, high-growth, disruptive companies start to come public.
The Dow futures is being used by the media to scare people. Their business model drives off fear and panic. If they can get you to click, that means higher click rates for their ads. The media and what they represent today is completely different than what it was 15 years ago when its primary role was to inform. Today it is for them to make as much money as possible.
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