Bewitched, bothered and bewildered by stocks
Stocks have had a crazy week. It must be the season of the witch! Quadruple witching, that is. But is the looming expiration of four derivatives really to blame?
NEW YORK (CNNMoney.com) -- Hop on your favorite broom. Let out your best cackle. Cuddle up with a black cat and twitch your nose like Samantha. Quadruple witching day is almost here!
Now for those of you who don't follow the markets religiously, you might be wondering what I'm talking about. But many investing experts have been chattering about how Friday could be a doozy of a day for the stock market because of what is known as quadruple witching day.
The term refers to the phenomenon that takes place several times a year when several derivatives contracts expire at the same time -- those tied to market index futures, market index options, stock options and stock futures. That could lead to a massive surge in stock trading as professional investors hedge their bets.
Stocks tends to be volatile leading up to a quadruple witching day and can be particularly erratic on the day the options and futures actually expire, especially in first and final hours of trading.
But if you are a typical buy-and-hold, long-term investor (and not a Jim Cramer what's the market going to do in the next tick type of trader), quadruple witching can make for a wacky day that's best to not make too much fuss over.
"For the most part it's going to be noise," said Mike O'Rourke, chief market strategist with BTIG, an institutional brokerage firm. "There may be a lot of hedging going on, but in the end I don't expect a tangible move in stocks that will notably influence the market beyond Friday."
Just look at what happened the last time there was a quadruple witching day. That happened back on March 20, and the S&P 500 fell nearly 2%.
But if you panicked that day and thought that it was time to bail on stocks, you'd have missed out on the market's big rally. The S&P 500 has shot up nearly 20% since then.
It just goes to show that even though Wall Street tends to get all in a lather about how the market performs in just one particular six-and-a-half hour trading session (and unfortunately we in the media are often guilty of participating in the frenzy as well), it pays to take a step back and not get too encouraged or discouraged by one day's gyrations.
"By and large, the world is full of short-term hazards and rewards. On any given day, while you can make an argument to be positive you can make an equally logical one to be negative," said Phil Dow, director of equity strategy with RBC Wealth Management in Minneapolis.
Talkback: Will the major stock indexes end the year up or down? And why? Leave your comments at the bottom of this story.
So investors need to be careful of reading too much into what happens Friday. Dow thinks that regardless of what happens, it's likely that many large institutional investors will start buying again next week since the second quarter will soon end.
With the Dow 30 now only down slightly for the year and the S&P 500 and Nasdaq both in positive territory, professional money managers may take part in some portfolio "window dressing" since they don't want to make it look like they've missed out on the big rally.
But Dow quickly added that "fundamentals remain cloudy," meaning that investors are still trying to figure out if the worst of the recession is truly behind us and what that will mean for corporate earnings.
As I explained in Wednesday's column, it's hard to know whether the bull will continue charging ahead in the second half of the year until there is more evidence of improving profits. And investors should find out more details once the deluge of second-quarter reports hit the market in July.
O'Rourke also pointed out that this is the beginning of the summer doldrums for the market. Volume has been relatively light as of late, which makes it even less wise to look at one-day swings in the market and ascribe any significant importance to them.
So at the end of the day, the looming quadruple witching hour won't matter much to most investors. How stocks fare for the remainder of 2009 will depend a lot more on what's going on with the housing market, the broader economy and corporate earnings -- not the expiration of derivatives contracts on a sleepy, summer Friday.
Talkback:Will the major stock indexes end the year up or down? And why? 
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