Cause that is when the trading gnomes, fairies, wizards and other nefarious evil doers work their magical mischief. Don't forget all those Amish traders that stay up until the wee hours of the morn raising havoc. By the way if any of you would like to buy some magical pixie trading dust just email me and I can send some over ASAP.
First, there are no trading programs hitting the market left and right, as has become the norm in the index futures over this past year... Second, its expiration week and alot of market makers, institutions, etc have alot of gamma exposure from their options positions...As the market moves x points, their exposure requires some form of hedge so the movements are sharp and erratic...The gang that jumped on the long side is wrong, then the gang that jumps on the short side takes over...Its ugly Third, seasonally the market has bottoming tendency at this time of the year(and now the press even calls this tendency...maybe dilluting the effect eventually)...But either way the numbers speak for themselves...In 1998 the market bottomed on the Thursday before options expiration(10/8/98). The FOMC did a surprise rate cut on the Thursday(10/15/98) prior to Oct expiration and the market ran 25% between the bottom and 11/20/98..In 1999, the market again bottomed on the Friday options expiration(10/15/99) and rallied into the end of the year...In 2000 things were completely out of whack due to the Gore-Bush election controversy, but a semi bottom had been placed in the weeks prior to the Nov 7,2000 election...2001, another extraneous event derailed the seasonal effect...However, this time the bottom occurred near the Sept expiration and the Oct expiration was a non-event... Perhaps, the most extreme scenario occured in 1997 when the market appeared to have bottomed into the Oct expiration(perhaps serving as the impetus for Niederhoffer to write naked puts on the SPX index). In the weeks following this event the market tanked massively on Oct 27th-Oct 28th, 1997...However, once it bottomed, it once again lifted off... Living thru these weeks over the past 5 years I have drawn the conclusion(nothing really new here either) that markets compress volatility into the end of August(VIX stats support this), they then spike volatility and sell the market hard into September setting up a very oversold condition into the major earnings reports and a potential springboard effect...Numbers can be whatever they want but the condition of the market has so many participants off balance that it tends to just provide the catapult...