Market Insider

Look Ahead: Wall Street Faces the Witching Hour

The path of the dollar and fallout from the quadruple expiration of futures and options could be big drivers for stocks Friday.

The New York Stock Exchange, downtown Manhattan.
Oliver Quillia for

There is no U.S. data of note, but investors will be watching for any spillover from Thursday's sell off which was heaviest for financial stocks and the materials sector. The Dow finished the day down 132 at 10,307 and the S&P was down 13 at 1096. The dollar firmed against the euro, gaining 1.4 percent to a level of $1.4340.

A bright spot Friday could be technology shares after Research in Motion's much better than expected earnings, reported late Thursday. Oracle also reported surprisingly good profits of $0.39 per share, compared to $0.34 last year, on sales of $5.86 billion, up from $5.69 billion.

Patrick Kernan of Cardinal Capital trades S&P 500 options at the CBOE and said Thursday's market activity was unusual. "Obviously, the market took a bit of a nosedive today, but after the open we hardly moved. The volatility was in the overnight session when the market sold off," he said.

"It was kind of odd just because there really wasn't a lot of positioning going on today. There were long lulls of inactivity, which is pretty unusual for expirations. That leads me to believe that people were kind of done for the year. Volatility has been taken out pretty good, and it feels like between now and the end of the year, we're going to see a whole lot of nothing," he said.

Traders said stocks moved lower as Citigroup slumped on the poor showing for its $20 billion secondary offering Wednesday. The market also traded lower as the dollar moved up, in an about face of the "risk on" trade. The dollar strengthened against the euro, in part on Standard and Poor's downgrade of Greece's debt, the second agency to do so this month.

"First thing in the morning, we have expirations for all the indexes and futures and at the end of the day, we have single stock and ETF expirations. Tomorrow is expiration Friday, so it's hard to predict. We could get some movement just because of expirations, but once we move into next week and the following week, it'll just be slow," Kernan said, adding the S&P should hover around 1100.

Birinyi Associates, in a note Thursday, said the Dow has closed down between 1 and 2 percent 21 times since the start of the bull market. The next day, on average, the market has gapped up 21 basis points and closed the day up 82 points. The next day has been positive 65 percent of the time, the note said.

Dollar Dilemma

Traders have been debating whether the dollar's recent behavior is just a correction or a real trend shift. They point to the last monthly employment report, when the dollar rose on positive news, something it hasn't done in some time. Since that day, Dec. 4, stocks have been able to hold gains against a strengthening dollar, but the big question is whether that trend can continue.

Many traders say the dollar is just reacting to year end positioning and should start to weaken after the beginning of the year. Interestingly, the dollar, while volatile, is now down just 2.5 percent against the euro year-to-date and is down 1 percent against the yen. The dollar index is down 4.4 percent in the same period.

Consumer Nation Holiday Central Edition

"It started out as a dollar story in the beginning of the week, and it turned into a euro story later in the week," said Boris Schlossberg of GFT Forex. "You combine that wit the fact that there are a tremendous amount of late-to-the-party euro longs."

For Friday, he said traders will be watching IFO, a reading on German business sentiment. "If there is any decline in the reading, that will be another catalyst to push it (the euro) lower. You are having this toxic combination of momentum unwinding and daily negative news," he said.

"Initially everybody thought this was just a correction. $1.45 - $1.46 was the big support level. If it breaks $1.40, it would do tremendous long term damage to the euro..if it breaks $1.40 that will suggest the move in the dollar is more fundamental than a counter trend rally,"said Schlossberg.

But he said the big story in 2010 could be once more the concern about the U.S. deficit and the potential for oversupply in Treasurys. "All those issues could haunt the dollar big time next year, but right now the focus is on the other side of the Atlantic,"  he said.

What Else to Watch

The Labor Department issues a state by state breakdown of the jobs numbers at 10:30 a.m.

President Obama is attending the wind down of the UN's climate change conference in Copenhagen.

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