Freedom Broker analysts warned of sharp S&P 500 swings due to expiration

Quarterly expiration of options and futures could have increased trading volume and intensified intraday swings in U.S. stock indices on September 18, Freedom Broker analysts warned. At the same time, they assessed the balance of risks for the S&P 500 as moderately positive, despite the expected volatility.

Freedom Broker expected high volatility

Expiration means the end of the validity of derivatives contracts. During this period, market participants exercise, close, or roll positions, which can lead to increased trading activity and sharp price moves, especially closer to the end of the session.

Freedom Broker analysts believe that the large quarterly expiration could have limited further gains in U.S. indices and amplified swings toward the market close. At the end of trading on September 18, the S&P 500 rose 0.2% to 7650.50 points. To finish the week in positive territory, the S&P 500 needed to add more than 0.3% and hold above 7657 points. 

Support for the market came from lower oil prices and falling yields on 10-year U.S. Treasuries. These factors improved investors’ risk appetite and allowed the market to focus on artificial-intelligence-related stocks.

S&P 500 ended the day with moderate gains

Although the S&P 500 rose, it did not break above the 7657-point level indicated by Freedom Broker. For the full week, the index slipped 0.1%. The Dow Jones lost 1.7%, and the Russell 2000 — 1.5%. The Nasdaq proved more resilient than the broader market and gained 0.7% for the week.

Trading activity also increased noticeably. As reported by Reuters, about 23.57 billion stock trades were executed on U.S. exchanges versus an average of 17.85 billion over the previous 20 trading days. The higher volume coincided with the quarterly expiration.

Rising yields capped the market

Index moves late last week were restrained by the rise in the yield on 10-year Treasuries, which approached 5%. This increased pressure on equities after an initial decline in rates in the bond market.

Semiconductor makers remained the main support for the Nasdaq. According to Reuters, the tech index ended the week higher thanks to a rally in chipmakers’ shares, while the broader market showed mixed performance.

Positive sentiment around the AI complex persisted despite calls to tighten regulation of the industry. However, the technical factor of expiration could temporarily limit index gains and increase volatility.

Futures returned to gains

On the morning of September 21, S&P 500 futures were up 0.4%, while Nasdaq contracts gained 0.6%. Support for markets came from rising tech companies and falling oil prices. Brent fell 1.7% to $102.08 per barrel, while U.S. WTI declined 1.8% to $98.53. At the same time, the bond market remained tense: the yield on 2-year U.S. Treasuries, after rising 36 basis points over two weeks, stood at 4.7604%.

This is not an individual investment recommendation.