In the US stock market, the monthly OE (option expirations) day (the third Friday of each month) is often a focal point for the market.
I. Weird Wednesday?
Some investors have pointed out that based on their personal trading experience, the Wednesday of the week preceding the monthly OE day tends to be weird, with the U.S. stock market facing significant downside risks.
For example, on the recent date of June 7th, both $S&P 500(.SPX)$ and $NASDAQ 100(NDX)$ experienced varying degrees of decline. Therefore, we conducted the following data analysis to explore the characteristics of this so-called Weird Wednesday.
1. Does Weird Wednesday perform worse than regular Wednesday?
As shown in the chart below, we calculated the difference between the rolling-52-week average returns of S&P 500 and Nasdaq 100 on all Wednesdays and the average returns on Weird Wednesdays since 2005.
If the value is positive, it indicates that the average returns on Weird Wednesdays are indeed worse than those on all Wednesdays, and vice versa.
Source: Bloomberg and Tiger Trade; Data period: January 2005 to present
Based on the analysis, we can draw the following conclusions:
During the period of 2007-2009, the returns on Weird Wednesdays were notably worse than those on all Wednesdays.
However, during the period of 2019-2021, the situation reversed, and Weird Wednesdays showed better performance.
Overall, Weird Wednesdays are not consistently worse than other Wednesdays in terms of returns.
2. Does Weird Wednesday exhibit greater intraday volatility?
Next, let's examine the intraday volatility. The chart below shows the difference between the intraday ranges of Weird Wednesdays and all Wednesdays since 2005.
If the value is negative, it indicates that the intraday volatility on Weird Wednesdays is greater than that on all Wednesdays, and vice versa.
Source: Bloomberg and Tiger Trade; Data period: January 2005 to present
Using the same dataset for analysis, the results indicate that Weird Wednesdays do not exhibit significantly higher intraday volatility compared to other Wednesdays.
3. Does Weird Wednesday exhibit greater downside risk?
Furthermore, let's analyze the probability of significant market declines on Weird Wednesdays.
The table below shows the probabilities of daily declines exceeding -2% for the two stock indices. In general, these probabilities are higher on Weird Wednesdays compared to regular Wednesdays, and this phenomenon exists across different time periods.
This may explain why some traders believe that "Weird Wednesday presents greater downside risk" based on their trading experience.
Source: Bloomberg and Tiger Trade; Data period: January 2005 to present
Therefore, although the performance of Weird Wednesdays in the US stock market is not significantly worse and the volatility does not appear to be higher, there is indeed a larger tail risk compared to regular Wednesdays. This is a risk factor that deserves our attention.
II. FOMC Meeting + Quadruple Witching Day: What Volatility and Opportunities Can We Expect for Assets?
Fed's FOMC meeting released its decision this Wednesday. The discussion on interest rate and the projected benchmark rates on the dot plot are fundamental to pricing global assets. Therefore, this event often leads to greater volatility in the markets.
Interestingly, this week also coincides with the well-known Quadruple Witching day in the U.S. stock market.
Quadruple Witching day (short for QWD) refers to the day when four types of derivatives contracts, including stock index futures, stock index options, stock index ETF options, and single-stock futures, expire and settle. It usually occurs on the third Friday of quarterly months (March, June, September, and December).
As a significant number of in-the-money options contracts expire on Quadruple Witching day, it increases overall market trading volume and may result in greater market volatility. Under the influence of dual events, it is important to assess whether asset risks have increased and whether any investment opportunities have arisen.
1. Intraday Volatility after FOMC and Quadruple Witching Day
Assets do experience greater intraday fluctuations on the day of the FOMC meeting and the following two days compared to regular trading days. Additionally, in historical instances when Quadruple Witching day coincides with the FOMC meeting, bonds and gold tend to exhibit slightly higher intraday volatility over the two-day period.
Source: Bloomberg and Tiger Trade; Data period: January 2005 to present
2. Is There a Greater Potential for Reversal?
In the three days following the previous FOMC meeting on May 3rd, both stocks and bonds presented reversal trend. Bonds $iShares 7-10 Year Treasury Bond ETF(IEF)$ initially rose and then fell, while stocks $SPDR S&P 500 ETF Trust(SPY)$ initially declined and then rose.
Source: Bloomberg
With that in mind, after the combination of Quadruple Witching day and the FOMC meeting this week, is there a possibility of even greater reversal opportunities that could provide us with some trading opportunities?
Here, let's first define a reversal length indicator. The chart below defines the reversal length for an uptrend, which refers to the overlapping portion between the rise and the subsequent pullback. The definition for a downtrend is similar, representing the overlap between the price decline and the subsequent upward rebound.
Compiled by Tiger Asset Management
Based on the reversal length indicator, various assets tend to experience larger reversal opportunities after the FOMC meeting compared to regular periods.
However, after the combination of Quadruple Witching, $iShares 7-10 Year Treasury Bond ETF(IEF)$ does exhibit slightly greater volatility and reversal patterns during the three days following the FOMC meeting, while the reversal characteristics of $SPDR S&P 500 ETF Trust(SPY)$ and $SPDR Gold Shares(GLD)$ appear to be weaker.
Source: Bloomberg and Tiger Trade; Data period: January 2005 to present
Overall, historical data suggests that the FOMC meeting does increase volatility in stocks, bonds, and gold. There is a higher likelihood of significant reversal opportunities after the meeting.
However, when the FOMC meeting coincides with Quadruple Witching, the reversal patterns in U.S. Treasury bonds become more pronounced after the FOMC meeting.
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