{"id":229678,"date":"2025-08-26T12:55:28","date_gmt":"2025-08-26T16:55:28","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=229678"},"modified":"2025-08-27T04:17:06","modified_gmt":"2025-08-27T08:17:06","slug":"the-market-ratchet","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/the-market-ratchet\/","title":{"rendered":"The Market Ratchet"},"content":{"rendered":"\n<p>Yesterday, we <a href=\"https:\/\/www.interactivebrokers.com\/campus\/podcasts\/ibkr-podcasts\/powell-to-the-people\/\">taped and released a podcast<\/a>.&nbsp; The main topic was about the markets\u2019 reactions to Chair Powell\u2019s Jackson Hole address, but I brought up a key element of stocks\u2019 behavior over recent sessions.&nbsp; It\u2019s something that I call the \u201cratchet effect\u201d, and today I\u2019ll explain what it is and why I believe it is critical to understanding the current market climate.<\/p>\n\n\n\n<p>The podcast contains this snippet:<\/p>\n\n\n\n<p><em>I think what we saw Friday was more of what I\u2019ve been calling the \u201cratchet effect\u201d in markets. We go down slowly when we go down. When we do have down days\u2014as rare as they seem\u2014they tend not to be of a huge magnitude. But when we go up, we go up big. So, we have this big up move, then ratchet lower, then up again. It\u2019s akin to turning a ratchet.&nbsp;<\/em><\/p>\n\n\n\n<p>Allowing for the fact that I repetitively ramble more when I speak extemporaneously than when I write, I\u2019d like to think that the ratchet analogy is clear to anyone who uses hand tools, but <a href=\"https:\/\/en.wikipedia.org\/wiki\/Ratchet_(device)\">for those who don\u2019t<\/a>:<\/p>\n\n\n\n<p><em>A&nbsp;<strong>ratchet<\/strong>&nbsp;(occasionally spelled&nbsp;<strong>rachet<\/strong>) is a mechanical device that allows continuous linear or rotary motion in only one direction while preventing motion in the opposite direction.<\/em><\/p>\n\n\n\n<p>That seems to describe the direction of most broad indices recently.&nbsp; Occasionally when using a ratchet, we can get some minor backwards slippage, and that seems to be an apt way of describing the minor dips that have punctuated the explosive rally that has been in place since the April lows.&nbsp; We don\u2019t go up every day, but the declines have been relatively rare and modest, while the upward moves have often been significant.<\/p>\n\n\n\n<p>Think about the market activity over the past two weeks.&nbsp; The S&amp;P 500 (SPX) had been moving roughly sideways about two weeks ago, then had a relatively sizable dip \u2013 at least by recent standards \u2013 about a week ago. That dip was erased within about a 10-minute period on Friday when <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/powell-to-markets-green-flags-are-up\/\">Powell\u2019s speech was released<\/a>, yet the powerful rally only pushed SPX to a 0.3% gain for the week, though.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-spx-2-weeks-5-minute-candles\"><strong><em>SPX, 2-Weeks, 5-Minute Candles<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"635\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/08\/image-33-1100x635.png\" alt=\"SPX, 2-Weeks, 5-Minute Candles\" class=\"wp-image-229679 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/08\/image-33-1100x635.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/08\/image-33-700x404.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/08\/image-33-300x173.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/08\/image-33-768x444.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/08\/image-33.png 1347w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/635;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>I firmly believe that the magnitude of the post-Jackson Hole move was abetted by the fact that it occurred on a Friday.&nbsp; <a href=\"https:\/\/www.interactivebrokers.com\/campus\/podcasts\/ibkr-podcasts\/powell-to-the-people\/\">As we noted yesterday<\/a>:<\/p>\n\n\n\n<p><em>Fridays are the ultimate ratchet days because not only do you have the usual daily expirations in major indices and ETFs, you also have weekly options expiring for over 600 big companies and other decent-sized ETFs. So it\u2019s much easier to get these things running on a Friday. I don\u2019t think it was a coincidence.&nbsp;<\/em><\/p>\n\n\n\n<p>We noted the <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/freaky-friday-another-spy-closing-ramp-or-gamma-squeeze\/?query=freaky%20friday&amp;query_id=ul4p8yTRQXyW8j7xWhvS2Q&amp;index=engine-name-placeholder&amp;user_token=ul4p8yTRQXyW8j7xWhvS2Q\">Friday effect as early as 2021<\/a>.&nbsp; There was a propensity for markets to have outsized upward moves on Fridays during the post-Covid run-up.&nbsp; The reason was that options traders learned that if enough of them piled into expiring calls, their activity could push markets higher.&nbsp; Since then, the industry has of course added daily expirations, so called \u201c0DTE\u201d options, but Fridays still matter.&nbsp; The daily expirations of key indices and related ETFs, especially SPX, can indeed propel markets higher on any day of the week, but on Friday we have another 600+ stocks and ETFs with expiring options.&nbsp; If a broad rally is in the cards, it is easier to achieve on Fridays.<\/p>\n\n\n\n<p>Note here that I\u2019ve focused solely on the upside.&nbsp; Quite frankly, we don\u2019t see the same enthusiasm for selling as we do for buying &#8212; even during market declines.&nbsp; Speculators prefer to trade from the long side than the short side.&nbsp; Also, the tendency for active traders to buy dips means that many are more poised to seek buying opportunities than to exacerbate market declines.&nbsp;&nbsp; This plays into the ratchet effect.<\/p>\n\n\n\n<p>It will be important to see if this recent effect stays in place.&nbsp; We saw some late profit-taking yesterday, but that activity and this morning\u2019s sideways movement doesn\u2019t negate the theory.&nbsp; We\u2019ll get a stern test on Thursday when the market reacts to the Nvidia (NVDA) earnings that are released after the close.&nbsp; A well-received result could lead to another ratchet up.&nbsp; Would a poorly received result be insulated by that ratchet effect?&nbsp; We\u2019ll know at least one answer soon enough.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Yesterday, we taped and released a podcast.\u00a0 The main topic was about the markets\u2019 reactions to Chair Powell\u2019s Jackson Hole address, but I brought up a key element of stocks\u2019 behavior over recent sessions.\u00a0 It\u2019s something that I call the \u201cratchet effect\u201d, and today I\u2019ll explain what it is and why I believe it is critical to understanding the current market climate.<\/p>\n","protected":false},"author":4,"featured_media":229682,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[14700,6,8,9,22,26,3],"tags":[8295,14265,10820,20513,17368],"contributors-categories":[13576],"class_list":{"0":"post-229678","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-ibkr-market-insights","8":"category-north-america","9":"category-region","10":"category-securities","11":"category-stocks","12":"category-text-articles","13":"category-traders-insight","14":"tag-jackson-hole","15":"tag-market-momentum","16":"tag-options-expiration","17":"tag-ratchet-effect","18":"tag-stock-market-trends","19":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast 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