When the market crashed in 2020, COVID was cited as the cause. A contagious virus was contaminating people across the globe. Businesses were shut down. In some nations, travel restrictions extended to being unable to drive more than 3 miles without encountering checkpoints. In anticipation of a global collapse of enterprise and transactions of goods and services, the stock market plunged.
At least that’s the story told.
Less well publicized was the timing of the crash. It began right after February expiration in 2020 and the market’s recovery began right after March’s options expiration. A coincidence? Perhaps. But what if something structural was taking place, and we’re on the cusp of it again today.
Today, we sit right at February’s options expiration, and again a window of market weakness has opened, creating the potential for a downdraft.
Will The Market Plunge?
While a market unraveling like the one that occurred in 2020 is unlikely, the next few days are a perilous time for investors who are bullish. The danger is so large that it was widely reported one of the greatest traders ever, Carl Icahn, allegedly opened massive bearish bets for both February and March options expiration periods. If history doesn’t repeat but instead rhymes and markets fall over the next month, the billionaire stands to make a fortune.
It’s worth noting that Carl isn’t your ordinary trader. And he’s not an investor either. He’s not like Buffett, who holds positions for donkeys years. Carl is more of the in-and-out trader who spots an opportunity, takes his profits, and runs to the next big opportunity. He’s got a knack for timing, and he understands derivatives markets well enough to make what appears to be a $100 million plus bet that markets will decline over the next 30 days.
The window of weakness starts today, but the fear might have started yesterday. In the last hour of trading, fear ran riot and the S&P 500 plummeted by 45 points to crater to the lows of the day. That’s a terrible omen for bulls on the eve of a prime window of weakness.
How To Trade The Next Month
If the market does unravel, it will do so quickly. Friday would be a down day and the long weekend will only exacerbate the bearish trend. If the selling begins, it will only propagate and grow. There is, however, a caveat.
It’s more widely known than ever that the market is entering a window of weakness. And that, reflexively, can lead to supportive market flows. How you might ask?
As traders buy puts to hedge against disaster, market makers must sell puts to them, and because they are hedged and delta neutral, they short stock also. If the market fails to decline, the positions are unwound. Traders sell back their puts, and market makers cover their shorts, which leads to bullish demand for stocks, causing an upward trend.
The bottom line is if the market falls Friday, expect weakness for at least the subsequent week before supportive end of month and early March flows kick in. But if the market fails to fall Friday and next week, expect FOMO buyers to chase the recent bullish trend and a furious rally to ensue in March towards the key end of quarter.