By Isabel Wang
Weak market breadth, triple witching and index rebalancing could increase stock volatility this week
U.S. stocks are on a seemingly unstoppable, record-breaking rally, but investor enthusiasm appears to be taking a back seat in what could be a quiet, holiday-shortened week, bifurcated by the Juneteenth celebration on Wednesday. .
The New York Stock Exchange and Nasdaq will be closed on Wednesday, June 19 to commemorate the end of slavery in the United States, as will American bond markets. Juneteenth has been observed in Black communities since the 19th century, but it wasn't until 2021 that President Joe Biden officially made it a federal holiday.
See: Is the stock market closed on June 16? Will the post office be open?
The summer months typically see moderate trading volume and mostly sideways movement in the stock market as children are out of school for the summer and investors go on vacation. But after a handful of Big Tech names again acted as drivers of the stock rally, highlighting the market's weak breadth, analysts warn there could be increased volatility that could generate downward pressure. in the short term on US stocks.
For a healthy stock market rally to occur, investors may want to see "a lot of trading volume" and "the number of stocks going up outpacing those going down by a pretty wide margin" in the market, Steve said. Sosnick, chief strategist at Interactive Brokers. "But we haven't achieved either," he said.
Since early June, there has only been one trading day in which the total trading volume of US stocks on the NYSE, Nasdaq, NYSE American and NYSE Arca was greater than the year-to-date moving average, according to Dow. Data from Jones Market (see chart below).
Over the past four weeks, there have been seven trading sessions in which the S&P 500 traded higher on a day when more stocks ended lower than higher. This is one of the highest numbers of negative divergences in a consecutive 20 trading day period since 1990, according to Bespoke Investment Group.
Typically, positive market breadth occurs when more stocks are rising than falling, which helps confirm the bullish trend in the stock market. A disproportionate number of declining stocks can indicate bearish momentum and a downtrend in the benchmark index.
"These are some of the reasons why you see people starting to wonder how sustainable the rally is because it's still a pretty short list of names that are really leading things," Sosnick told MarketWatch by phone on Monday.
See: 'Don't short in a boring market' is the advice stock investors need right now
June is typically a quiet month for US financial markets, with stock trading volumes declining as summer approaches. However, this holiday-shortened week also features an uncertainty known as "triple witching," an event in which stock options, stock index futures and stock index options contracts expire on the same day. It sometimes leads to higher volatility in the days leading up to the event itself, said Bill Hornbarger, chief investment officer at Benjamin F. Edwards.
Friday's "triple witching" expiration event also coincides with the quarterly rebalancing of some of the most popular U.S. benchmark indices and exchange-traded funds.
One of the world's most prominent technology ETFs appeared headed for a major shakeup, as Microsoft Corp. (MSFT) will maintain the top weighting in the S&P Technology Select Sector Index, while Nvidia Corp. (NVDA) will rise to the No. 2 spot. . weighting, eclipsing Apple Inc. (AAPL).
MarketWatch reported Monday that the $71 billion Technology Select Sector SPDR ETF XLK, which tracks the index, could be forced to buy nearly $10 billion in Nvidia stock later this week, while selling more than 11 billion dollars in Apple stock. The rebalancing will see Microsoft and Nvidia end up with weights of about 21% in the fund once the new weights are officially implemented by market close on Friday, while Apple's weight is expected to fall to 4.5% from about 22%.
See: Popular tech ETF forced to dump Apple stock and buy Nvidia in upcoming rebalancing
As a result, Sosnick said he expects to see "a big surge" of trading volume on Friday after some "pretty light" trading activity during the holiday-shortened week.
"But right now it's a handful of stocks that are leading the market, so as long as people feel like continuing to chase them or invest money in them, things could get really complicated very quickly," he said.
Also adding to this week's uncertainty is the lack of macroeconomic catalysts, such as the release of key economic data or closely followed earnings reports, to drive stock trading volume.
"When you have a fairly quiet moment with few [macro] "There are no catalysts for volume, but there is a lot of potential rebalancing, that's when things can get a little shaky," Sosnick said. "Market emotion tends to stay in motion until an external force acts on it."
U.S. stocks mostly rose Tuesday morning after May retail sales data showed retail sales were weaker than expected last month. The S&P 500 SPX rose 0.2%, while the Dow Jones Industrial Average DJIA rose 0.2% and the Nasdaq Composite COMP was nearly flat, according to FactSet data.
-Isabel Wang
This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.
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06-18-24 1148ET
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