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  • US equities spent most of US trading hours on the back foot, only to rally sharply into the close.
  • Quad witching and Tesla’s inclusion in the S&P 500 index next Monday distorted trade.

US equities seemingly did not trade as a function of the usual themes that have been driving the price action as of late. Despite continued positive sounds coming from Capital Hill regarding the progress of Congressional Leaders and negotiators towards a deal on further US fiscal aid and despite expectations that the FDA is on the cusp of giving Moderna’s Covid-19 vaccine emergency use authorisation, major US equity bourses slid back from record-high opening levels to close in the red.

The S&P 500 closed the session down 0.3%, though did recovery sharply back from session lows in the 3680s back to 3710 in the final hour of trade (not enough to get back to opening all-time high levels at 3720). The Nasdaq Composite Index closed with losses of 0.27% and the Dow with losses of 0.25% (but the index stayed above 30K).

Factors distorting Friday trade…

1) Friday was 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 meant a lot of early rebalancing of portfolios.

2) Friday was 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.”

3) Tesla (TSLA) will officially join the S&P 500 on Monday the 21st of December. Some had predicted this would trigger a “frenzied” day of trade on Friday give 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 speculated 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, which to some degree does appear to have occurred this Friday.