Market Commentary: Valentine’s Day Massacre Begins Now

For investors who are only familiar with stock investing, the options market can seem like a great unknown. That market is so large that it can sometimes act like the tail wagging the dog.

As we approach the monthly expiration of options in February, the risks to the market grow. That fact is well understood by one analyst, in particular, who has stated the Valentine’s Day massacre may be upon us.

If he’s right, the market could be on the cusp of falling precipitously and by a huge amount. So, how far could it fall?

Key Points

• If the options market is the tail wagging the equity dog, now is the time when a period of potential market weakness begins.
• Expect the time frame to last as long as one month, through to the monthly expiration in March.
• If the market does fall, a pullback of 500 points in the S&P 500 is reasonable.

Valentine’s Day Massacre

The last time we referenced Cem Karsan, we noted that he had successfully forecast a bullish reversal in the market from the bearish October 2023 decline.

He forecast that the market would likely enjoy tailwinds from bullish options flows that would continue through the November and December months and into mid-January.

At that point, following VIXperation in January, a window of weakness would open when the market could fall. If it failed to move meaningfully lower, though, the bullish flows would continue until February’s VIXperation.

Karsan noted that it’s likely no coincidence even the COVID lows coincided with this very weak period from February to March options expiration, with the low punctuated by March options expiration.

Now that the market is on the cusp of February’s monthly options expiration, a big red flag should be hoisted in every investors’ account that warns danger is high over the next 30 days.

How Far Could The Market Fall?

If the market does tumble and fall, how far could it go? The reality is the move up to 5,000 has been fast and furious. Valuations are getting stretched. The Dean of Valuation has come out and stated he can’t even come close to explaining away Nvidia’s valuation. Eventually, reality sets in and prices return from outer orbit to more grounded and realistic levels.

In 2020 the market plunged by about 30% during this February to March window, but that was on the back of a bearish narrative and health scare. More likely a 7-10% pullback is reasonable and realistic. If the market does fall, the S&P 500 pulling back to 4,500 is a reasonable first stop by March options expiration.

While there is no guarantee that the market will fall, the bullish run for almost 4 months has resulted in massive and sustained overbought levels, and famously the market can remain irrational longer than investors can remain solvent. So can higher prices still follow? Certainly. But the balance of reward and risk now favors a downside move, and seasonally this period of weakness offers an opportunity for the bears to finally pounce.