It’s quarterly expiration Friday. Futures, futures options, and index options expired on the open, and after a relatively calm pre-market (despite an attempted late ramp higher), the real action will be in the equity and ETF options that expire at the close. Every time a stock crosses through an option strike, someone needs to re-hedge. The larger the open interest, the more that need increases. As a result of retail investors’ recent embrace of options – mostly calls – there are very large open interests in important stocks and ETFs.I like to keep an eye on lines near the current prices with big open interest, like SPY 330 and 335’s and QQQ 265 and 270’s. Those strikes act like magnets – sometimes they attract, sometimes they repel. It depends who is long and who is short, their relative risk tolerances, and any exogenous news and trends that are in place.

The Nasdaq mega-caps led us on the way up. What happens now that they may be turning over? NDX has been trading below its 50-day moving average since April, and 10-day moving average crossed below the 30-day for the first time since April as well, It is too early to call this a turning point because the long-term uptrend remains in place, but this is a crucial time for a very extended index. With NDX falling below the 30-day moving average that provided support throughout the rally, and now falling below the 50-day moving average, that uptrend may be threatened. And if you worry less about what happens in NDX than SPX, remember –  what happens in NDX has an effect on SPX, since the 6 companies that makeup about half of NDX make up about a quarter of SPX.

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The SPX trend was less vertical than the NDX trend this year, with the 50-day moving average providing support rather than the 30-day, but that line has been breached in SPX as well. The worry is that the next major moving average is the 100 day, which is down another 5% from here. But the good news is that the longer-term trends are still pointing higher.

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Investors are clearly nervous about the election and its aftermath, evidenced in the VIX futures curves displayed below. Implied volatilities are higher across the board than they were last month, which is to be expected after the recent market pullback, but the most notable change is in the higher levels that we see for November and beyond. Remember that VIX is the market’s best estimate of 30-day forward volatility, so the October expiration covers the election period. We had seen a peak for VIX futures in October for months, which was unsurprising. But now we are seeing a peak AFTER the election and higher levels throughout the 1st quarter. Either investors fear that some sort of contested election is becoming increasingly likely, or that the Democrats capture the White House and Senate, causing investors to fear capital gains and corporate tax increases (or both!). None of those are market-friendly outcomes, and the VIX is displaying nervousness around the potential timing of them.

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It appears that both the equity and options markets are pricing in risks that they hadn’t considered for months. If investors have been riding the market higher for the past few months, it is not evident that they should change their investment thesis. But in a seasonally difficult time amidst an uncertain political backdrop, it seems prudent to incorporate more risk aversion into their portfolios.