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  • The S&P 500 briefly slipped below the 3700 level after the open, though has recovered back above it in recent trade.
  • A few factors have been distorting the price action on Friday…

The S&P 500 dropped briefly back below the 3700 level shortly after the open of US cash equity trade at 14:30GMT, although has recovered a few points back above it in recent trade. At the moment, the index trades lower by about 0.3%.

No particular catalysts triggered the selling, indeed, the latest noises regarding US fiscal stimulus remain positive (Democrat officials were just on the wires talking about a deal being done by Saturday), though the deadline to extend government funding is 23:59EDT today (i.e. just before midnight Eastern time on Friday 18 December), and this will also need to be dealt with. Meanwhile, the FDA is expected to give emergency use authorisation to a second Covid-19 vaccine before the start of the weekend (Moderna’s vaccine).

Reasons for choppy equity market trade this Friday…

Note that a few distortive market forces have been in play this Friday.

1) This Friday will be the final day of the year for many financial market participants who will be taking next week off for Christmas celebrations, so European and North American markets are expected to be particularly quiet next week. That means a lot of early rebalancing of portfolios.

2) This Friday is the quarterly quad-witching day. Here is Investopedia’s explanation of what that means… “Quadruple witching refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September, and December. Quadruple witching days witness heavy trading volume, in part, due to the offsetting of existing futures and options contracts that are profitable.” Pretty much, unpredictable volatility is normal (hence potentially why stocks sold off a little despite no catalyst).

3) Moreover, Tesla (TSLA) will officially join the S&P 500 on Monday the 21st of December, which some predicted would cause a “frenzied” day of trade this Friday. Analysts note that Tesla’s inclusion will prompt the dozens of index funds that track the S&P 500 to purchase billions of dollars of stock at Friday’s closing price, as they seek to track the index as closely as possible. Traders think the given the size of Tesla’s market capitalisation and the intra-day volatility of its share price, its addition could trigger significant market volatility. That does not entirely seem to have come into fruition, but could be contributing to weakness in the stock market.