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Triple Witching Causes Volatility As U.S. Stocks Close Lower, Yet Record Best Week Since March

U.S. stocks closed slightly lower on Friday, 16th June 2023, interrupting the S&P’s six-day winning streak, but still marking its best week since March. This week also saw the expiration of about USD 4.2 trillion worth of contracts tied to stocks and indices, commonly known as triple witching. Traders believe that this event, which had 20% more volume compared to last year, created some volatility and led to rebalancing of positions. 

The pause in rate hikes from the Federal Reserve and China’s stimulus package were also a positive for the week. 

Another positive catalyst was the consumer price index for May which showed a deceleration in both headline and core CPI. Additionally, the Producer price index (PPI) for May came in lower than expected on a month-on-month and year-on-year basis. 

However, jobless claims were higher than expected, suggesting that the jobs market is starting to falter. 

Investors largely disregarded the comments by the Fed about the potential rate hikes in July and the absence of rate cuts over a year. 

For the week, the Dow Jones average rose 1.3%, the S&P 500 climbed 2.6%, and the Nasdaq Composite jumped 3.3%, marking its eighth consecutive winning week in a row.  

Here are the closing levels on Friday, 16th June 2023:

 Last Change %Change 
Dow Jones 34,299.12 -108.94. -0.32% 
S&P 500 4,409.59 -16.25. -0.37% 
Nasdaq Comp 13,689.57 -93.25. -0.68% 
U.S. 10Y 3.76%   
VIX 13.54 -0.95. -6.62% 

Both the S&P and Nasdaq hit their highest levels since April 2022 last week. 

In the last three weeks, global U.S. equity inflows amounted to USD 38 billion, the strongest momentum of flows into the asset class since October, according to Bank of America, citing EPFR Global.  

With recession fears almost forgotten, the Fed nearing the end of its hiking cycle, the AI frenzy, and strong momentum, investors have no choice but to join the rally or get left behind. This phenomenon, also known as the fear of missing out (FOMO), has defied expectations, even as analysts from Bank of America and Morgan Stanley warned of a potential selloff. 

These two analysts, citing overbought markets are predicting that the S&P could decline towards the 4400 level in the short term. 

To be fair, analysts have been calling for a pullback for some time now, but we have not seen a significant pullback since the rally began in January. Therefore, waiting for a pullback before entering the market has proven to be a bad strategy for some who had no choice but to join in the rally. 

While we all know that every rally eventually comes to an end, right now it seems that nobody wants to bet on that happening, and the buyers are well aware of this.

Given this sentiment, it is not difficult to envision the rally continuing in the short term. However, considering the VIX is at such low levels, it would not be a bad idea to buy some protection as a precaution. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years. 

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