While U.S. stocks are on what seems like an unstoppable record-setting rally, investor excitement seems to be fading. This could be a quiet week, since Wednesday is a holiday that breaks up the week.
On June 19, the New York Stock Exchange, the Nasdaq, and the U.S. bond markets will all be closed to honor the end of slavery in the United States. Even though Black communities have celebrated Juneteenth since the 1800s, it wasn’t until 2021 that President Joe Biden made it a federal holiday.
Since kids aren’t in school during the summer and investors are taking vacations, the stock market tends to have low trading volume and mostly flat movement. But after a few big tech names led the stock market rally again, which showed how thin the market is, analysts are warning that there may be more volatility, which could push U.S. stocks down in the near future.
In order for the stock market to rise in a healthy way, Steve Sosnick, chief strategist at Interactive Brokers, said that investors may want to see “a big trading volume” and “the number of stock advancers outpacing decliners by a pretty wide margin.” “But we didn’t get either,” he said.
There has only been one trading day since the beginning of June when more U.S. stocks were traded on the New York Stock Exchange, Nasdaq, NYSE American, and NYSE Arca than on any other day this year so far, according to data from Dow Jones Market.
In the last four weeks, there have been seven trading days when the S&P 500 went up on a day when more stocks went down than up. Based on Bespoke Investment Group, that is one of the most negative divergences seen in a 20-day rolling period since 1990.
Positive market breadth usually means that more stocks are going up than going down. This helps to confirm that the stock market is going up. For example, a large number of stocks going down could mean that the benchmark index is going down.
“This is one reason why people are starting to wonder how long the rally will last, since there are still only a few names really driving things,” Sosnick told MarketWatch on the phone on Monday.
June is usually a slow month for U.S. stock markets because more people are taking their vacations in July and August. “Triple witching,” on the other hand, is a risk that comes up when stock options, stock-index futures, and stock-index options contracts all expire on the same day. This week is shorter because of the holidays. Bill Hornbarger, chief investment officer at Benjamin F. Edwards, said that it can cause prices to be more volatile in the days before the event.
The “triple witching” expiration event on Friday happens at the same time that some of the most popular U.S. benchmark indexes and exchange-traded funds rebalance every three months.
It looked like one of the most well-known technology exchange-traded funds (ETFs) in the world would be going through a big change. Microsoft Corp. MSFT, -0.45% will keep the top weighting in the S&P Technology Select Sector Index, while Nvidia Corp. NVDA, +3.51% will move up to No. 2 and pass Apple Inc. AAPL, -1.10%.
On Monday, MarketWatch said that the $71 billion Technology Select Sector SPDR ETF XLK, which tracks the index, might have to buy almost $10 billion worth of Nvidia shares later this week and sell more than $11 billion worth of Apple shares. After the rebalancing, Microsoft and Nvidia will each have about 21% of the fund’s value. Apple, on the other hand, will see its value drop from about 22% to 4.5%. The new weightings will take effect at the end of the market on Friday.
Since this is the case, Sosnick said he expects to see “a big flurry” of trading activity on Friday after a “fairly light” week due to the holidays.
“But right now only a few stocks are pushing the market up. As long as people keep buying them or piling money into them, things could get very dangerous very quickly,” he said.
This week, there aren’t any major economic events that could change the market, like important economic data releases or earnings reports that everyone is watching, which would normally make trading more active.
According to Sosnick, things can go awry when there aren’t many big events that could cause volume but there is a big chance for rebalancing. “Market emotion tends to stay in motion until an outside force changes it.”
The Nasdaq Composite and the S&P 500 both set new highs on Tuesday afternoon. This came after retail sales data for May showed that last month’s sales were lower than expected. According to FactSet, the S&P 500 SPX went up 0.3%, the Dow Jones Industrial Average DJIA went up 0.2%, and the Nasdaq COMP went up almost nothing.
