BofA Merrill Lynch technical strategist MacNeil Curry points out in a note to clients titled “Triple witching hangover” that this week is consistently one of the worst of the year for the stock market:
The week ahead is all about US equities. Specifically, the week after September Triple Witching (the term used for the quarterly expiry of US equity index futures, options on equity index futures and equity options) is consistently one of the poorest of the year for the S&P 500. In the 31 years since the creation of equity index futures, the S&P 500 has fallen 68% of the time. More recently, it has fallen in nine of the past 11 years.
With the S&P 500 forming a near-term top and set to correct lower, seasonals should win out once again. While such a drop should ultimately prove temporary and corrective, in the week ahead this bodes poorly for risk assets such as emerging markets and commodities. Safe havens such as the US $US and Treasuries should benefit, with the Treasury curve likely to flatten. From an FX perspective, the Canadian $US looks particularly vulnerable in this environment, as USDCAD is resuming its year-long uptrend.
“This seasonal effect appears to be intensifying,” says Curry. Whereas over the past 31 years, the S&P 500 has averaged a decline of 0.64% and fallen 68% of the time, “over the past 10 years, it has averaged a decline of 1.89% and fallen 80% of the time.”
The chart below shows returns in the week after triple witching over the past several years.