U.S. stocks are riding a seemingly unstoppable record-setting rally, yet investor enthusiasm is somewhat dampened by the prospect of a quiet, holiday-shortened week split by the Juneteenth observance on Wednesday. This federal holiday, established in 2021 by President Joe Biden, marks the end of slavery in the United States and has been celebrated in Black communities since the 19th century. As a result, the New York Stock Exchange, the Nasdaq, and U.S. bond markets will be closed on June 19.
Summer Trading Dynamics
Summer months typically see subdued trading volumes and sideways market movements, as many investors take vacations and children are out of school. However, the current market rally has been largely driven by a select few Big Tech stocks, raising concerns about the rally’s breadth and sustainability. Analysts warn that this narrow leadership could lead to increased volatility and potential downward pressure on U.S. stocks in the near term.
Steve Sosnick, chief strategist at Interactive Brokers, notes that for a healthy stock-market rally to occur, there should be “a big trading volume” and “a significant number of stock advancers outpacing decliners.” These indicators, which confirm market uptrends, have been notably absent. Instead, the market’s strength has been concentrated in a few high-performing stocks, leading to concerns about the rally’s foundation.
Market Breadth and Trading Volume Insights
Data from Dow Jones Market shows that since the beginning of June, only one trading day had total trading volume for U.S. stocks on major exchanges surpassing the rolling year-to-date average. Additionally, the S&P 500 experienced seven trading sessions over the past four weeks where it gained even though more stocks declined than advanced. According to Bespoke Investment Group, this is one of the largest counts of negative divergences in a 20-trading-day rolling period since 1990. Such divergences suggest bearish momentum, questioning the rally’s durability.
Impact of Triple Witching and Rebalancing
This week is further complicated by “triple witching” on Friday, a quarterly event where stock options, stock-index futures, and stock-index options contracts all expire on the same day, often resulting in heightened market volatility. Additionally, this Friday coincides with the quarterly rebalancing of major U.S. benchmark indexes and exchange-traded funds (ETFs). For example, the Technology Select Sector SPDR ETF, a leading tech ETF, will undergo a significant reshuffling. Microsoft Corp. will maintain its top weighting in the S&P Technology Select Sector Index, while Nvidia Corp. will rise to the second position, overtaking Apple Inc. This rebalancing forces the ETF to buy nearly $10 billion in Nvidia shares while selling over $11 billion in Apple shares.
Anticipated Market Movements and Analyst Views
Sosnick predicts a “big flurry” of trading activity on Friday due to these events, contrasted with relatively light trading earlier in the week. He cautions that the market could experience swift volatility, especially if investors continue to chase a few leading stocks. The absence of significant macroeconomic catalysts, such as key economic data releases or major earnings reports, also contributes to the week’s uncertainty.
“When you have a fairly quiet time with few [macro] catalysts for volume, but a big potential rebalance, that’s when stuff can get a little wonky,” Sosnick explains. “Market emotion tends to stay in motion until acted upon by an outside force.”
Current Market Performance Snapshot
On Tuesday morning, U.S. stocks were mostly higher following weaker-than-expected May retail sales data. The S&P 500 rose by 0.2%, the Dow Jones Industrial Average increased by 0.2%, and the Nasdaq Composite remained nearly flat, according to FactSet data.
In summary, while the stock market continues its impressive rally, the combination of a holiday-shortened week, the Juneteenth observance, and the “triple witching” event add layers of complexity and potential volatility. Investors and analysts are keeping a close watch on trading volumes and market breadth to determine the rally’s sustainability amidst these varied factors. This week’s market dynamics underscore the ongoing tension between bullish market momentum driven by a few key stocks and the broader concerns about market health and volatility.
