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The stock market break on June 16 precedes a possible stock market turmoil at the end of the week. What investors need to know.

The stock market break on June 16 precedes a possible stock market turmoil at the end of the week.  What investors need to know.
The stock market break on June 16 precedes a possible stock market turmoil at the end of the week.  What investors need to know.

 


By Isabelle Wang

Market weakness, the triple witch and index rebalancing could increase stock volatility this week.

U.S. stocks are enjoying a seemingly unstoppable record 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 the Nasdaq are closed on Wednesday June 19 to commemorate the end of slavery in the United States, as are the American bond markets. Juneteenth has been celebrated 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 movements 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 led stocks' rise, highlighting weakness in market breadth, analysts warned there could be increased volatility which could put short-term downward pressure on US stocks.

For a healthy stock market rebound to occur, investors may want to see “significant trading volume” and “a number of advancing stocks far outweighing declining stocks” in the market, Steve Sosnick said , chief strategist at Interactive Brokers. “But we got neither,” he said.

Since the beginning of June, there has been only one trading day where the total trading volume for U.S. stocks on the New York Stock Exchange, Nasdaq, NYSE American and NYSE Arca was above average sliding since the start of the year, according to Dow. Jones market data (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 finished lower than higher. This is one of the largest negative divergences in a rolling 20 trading day period since 1990, according to Bespoke Investment Group.

Typically, positive market momentum occurs when more stocks are moving up than down, helping to confirm the stock market's uptrend. A disproportionate number of declining stocks may indicate bearish momentum and a downward trend in the benchmark index.

“That's one of the reasons why people are starting to question how sustainable the rally is, because it continues to be a pretty short list of names that are really leading things,” Sosnick told MarketWatch per phone Monday.

See: “Don’t Short Sell in a Boring Market”: This is the advice stock investors need right now.

June is typically a quiet month for U.S. financial markets, with stock trading volumes declining as summer approaches. However, this holiday-shortened week also presents uncertainty known as “triple witching” – an event in which stock options, stock index futures, and stock index options contracts all expire on same day. This sometimes leads to increased volatility in the days leading up to the event itself, said Bill Hornbarger, chief investment officer at Benjamin F. Edwards.

Friday's “triple wizard” expiration event also coincides with the quarterly rebalancing of some of the most popular U.S. benchmarks and exchange-traded funds.

One of the world's most important technology ETFs appears headed for a major shakeup as Microsoft Corp. (MSFT) will retain the top weighting in the S&P Technology Select Sector Index, while Nvidia Corp. (NVDA) will move to second place. weighting, eclipsing Apple Inc. (AAPL).

MarketWatch reported Monday that the $71 billion Technology Select Sector SPDR XLK ETF, which tracks the index, may be forced to buy nearly $10 billion worth of Nvidia shares later this week, while selling for more than $11 billion in Apple stock. The rebalancing will see Microsoft and Nvidia end up with weightings of around 21% in the fund once the new weightings are officially implemented at market close on Friday, while Apple's weighting is expected to drop to 4.5 % versus around 22%.

See: Popular Tech ETF Forced to Ditch Apple Stock and Buy Nvidia in Upcoming Rebalance

As a result, Sosnick said he expects to see “a big wave” of trading volume on Friday after some “pretty light” trading activity throughout the holiday-shortened week.

“But for now, it's a handful of stocks that are leading the market higher, so as long as people are willing to keep chasing them or putting money into them, things could get really difficult very quickly,” he said.

Also adding to the uncertainty this week is a lack of macroeconomic catalysts such as the release of key economic data or closely watched earnings reports to boost stock trading volume.

“When you have a fairly quiet time with little [macro] “It’s a catalyst for volume, but a big potential rebalance, that’s where things can get a little shaky,” Sosnick said. “Market emotion tends to stay in motion until acted upon by an outside force.”

U.S. stocks were mostly higher Tuesday morning after May retail sales data showed retailers' 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 almost flat, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and the Wall Street Journal.

 

(END) Dow Jones Newswires

06/18/24 1148ET

Copyright (c) 2024 Dow Jones & Company, Inc.

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