June Trading Ends With 3 'R's: Rotation, Rebalancing and Repositioning
The first trading day in July is historically the third-best-performing day of the year.
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Market action this week was marked by two events. The first was choppy-and-inconsistent rotation in and out of big-cap technology names and into other areas of the market. The second was preparation for the rebalancing of the Russell indexes and various ETFs such as the SPDR S&P Biotech ETF XBI.
Neither of these events is stock specific, so fundamentals and chart patterns don’t matter much. In addition, the process of moving in or out of an index or adjusting weightings isn’t just a simple matter of buying or selling a stock. It may involve options, shorting, or other complex transactions so that brokers don’t lose money while they accumulate or dispose of the shares that are needed by the indexes.
The bottom line is that it creates random action and may result in mispricing, which is eventually corrected once the indexing is concluded and stocks move back to normal trading.
Another issue that came into play this week is that it is the end of the second quarter, so there is likely some window-dressing and repositioning. The Magnificent Seven names were looking good until about midday on Friday, when everything reversed and went red. This group is still leading the market, but there were a few signs of rotational action that did not gain momentum.
If you check your favorite stocks at the close on Friday, it is very likely you will see some large blocks cross. Nearly every stock in the market is impacted by index rebalancing to some degree, even if it is just a slight change in relative weighting. It is meaningless action in the long run but does create confusing movement.
Next week, we will start the new month. The first trading day in July is historically the third-best-performing day of the year. After that, there is a half-day session on Wednesday, July 3, and the market is closed on Thursday, July 4. On Friday, the June jobs news will be a market mover, but it is likely to be a very thin day of trading.
The big question next week is whether the lopsided big-cap technology leadership continues or if there will be some sort of rotational action. There have been a few rotational moves, but so far, nothing has resulted in a major change in market character.
Have a good weekend. I’ll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
