Markets Are at a Critical Juncture as Various Catalysts Are About to Hit
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Friday will be the largest volume day of the year due to the reconstitution of the Russell indexes.
There have been a couple of market themes at work recently. First is the lopsided action, with the gulf between a small number of big-cap technology stocks and the rest of the market hitting record levels.
The second theme is the lack of concern that interest-rate cuts keep being delayed. The market narrative has been that the power of AI is not only driving big-cap technology but also delivering strong economic growth, which is offsetting worries about inflation and high interest rates.
The big question for market participants is whether these themes will shift and cause a change in market character.
Big-cap technology finally took a brief rest on Friday, with Nvidia NVDA dropping after a large intraday reversal on Thursday. It is indicated lower again very early on Monday morning, which weighs on the Nasdaq 100 QQQ.
There was some rotational action into small caps IWM and the DJIA on Friday, but it was also a day of major option expiration, which likely caused some non-fundamental volatility. The question now is whether this rotation gains momentum.
Several factors are starting to impact the economy. The first and most significant is growing concern about economic weakness. Bonds have been seeing increased interest as worries build, but there is still a tremendous amount of uncertainty about inflation and the degree to which the Fed may start to anticipate economic slowing. There is a very important inflation reading on Friday that will likely see a market response.
Two other events this week may affect the market. The first is the presidential debate on Thursday night. A poor showing by President Biden would likely cause some panic for the Democrats and could increase speculation about a new candidate. That is likely to impact the market in some manner.
The other big event this week is the Russell indexes reconstitution at the close on Friday. This event typically produces the highest volume of the year as more than 3,000 stocks are rebalanced in various ways. There will be huge blocks of shares traded at the closing bell on June 28, and there is likely to be heightened volatility during the week as brokers prepare for the event.
Bitcoin IBIT is breaking down early on Monday morning, and there is going to be speculation that it is signaling some deeper problems in the market and the economy. We need to keep an eye on this, as a further drop will likely have market repercussions.
Early indications are mixed, and market players appear to be more uncertain than usual.
At the time of publictaion, Rev Shark had no positions in any securities mentioned.
