Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Quadruple Witching: A Risk-Adjusted Factor Experiment

Summary

Leading up to Friday's quadruple witching, Growth and Value Factor trends in Q1 2019 are somewhat mimicking Q1 2018.

Quality in 2019 seems to be following in its Q1 2018 shadow.

No clear trends on Momentum and Volatility are seen yet.

Quadruple witching! Sounds ominous. But it happens every quarter, on the 3rd Friday of the last month of that quarter (March, June, September and December). Quadruple witching occurs when index futures, stock options, stock index options and single stock futures all expire simultaneously. In addition, the date coincides with large index and ETF portfolio rebalances. This perfect storm of trading creates a lot of interesting undercurrents and opportunities.

At ETFLogic, we have a special focus on factors. As a little experiment, let’s look at market adjusted factors during the February to March timeframe in 2018 and 2019.

Value and Growth Factor Market-Adjusted Returns for 2018 and 2019

Let’s first look at value vs growth performance over these two time periods. Here are some interesting points to note:

  • Growth and Value Factor trends in Q1 2019 are somewhat mimicking Q1 2018.
  • Growth continues to be the Street’s favorite factor over Value. Growth has continuously outperformed while Value underperforms.
  • Around the 32nd day of our analysis – March 16, 2018 – we see a mean reversion in this performance.
  • You could – conceivably – expect a mean reversion in these spreads after quadruple witching on Friday – March 15, 2018 – the 30th day on the graph.

Quality and Dividend Factor Market-Adjusted Returns for 2018 and 2019

The picture isn’t as neat and clean with dividends and quality factors.

  • We see around 150-200bps of outperformance in both factors right before the 3rd Friday.
  • There is an expected reversion post-Friday
  • Quality in 2019 seems to be following in its Q1 2018 shadow.
  • Dividends have languished a bit, relatively speaking. With the prospect of a rising rate environment, investors have overall been less interested in equity yields.

Momentum and Low Volatility Factor Market-Adjusted Returns for 2018 and 2019

Moving to more technical factors, let’s focus in on momentum and volatility.

  • Momentum 2018 seems to have taken us on a wild ride: outperforming over 300bps between February 1, 2018 and March 15, 2018. We see a strong mean reversion of over 200bps in the few days after.
  • Low Volatility 2018 languished sideways throughout the period.
  • In 2019, we don’t see any clear trends in momentum and volatility, yet…

NOTE: ETFLogic does not intend to provide any trade guidance or offer advice on investment opportunities.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.