Puzzled Why Your Favorite Stocks Are Declining This Week? This May Be Why
And it has nothing to do with fundamentals.
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It was another messy day of action on Wednesday, but a late rally pushed the senior indexes to small gains. Still, breadth was solidly negative again with around 3,600 gainers to 5,600 decliners.
The Magnificent Seven helped the bullish cause once again with strong action from Amazon AMZN, Tesla TSLA, and Apple AAPL. However, only 37 of the 101 stocks in the Nasdaq 100 saw gains.
Once again, new 12-month lows exceeded new 12-month highs, and sectors such as semiconductors, biotechnology, and financials acted poorly.
One of the problems the market is grappling with this week is the major rebalancing of ETFs and various indexes that will become effective at the close on Friday. Much of the rebalancing is in the various Russell indexes, but other areas are also being rebalanced, such as the SPDR S&P Biotech ETF XBI.
The XBI rebalancing is hurting many of the lower-priced names because it is moving from an equal-weighting system to a capitalization-weighting system like that used by the Nadaq 100 QQQ. The biggest stocks will be given much more weight. This means that the ETF has to sell smaller stocks to buy more of the big-cap names. Currently, there are 131 stocks in the XBI ETF, but only 39 of them traded up on Wednesday, while the other 92 lost ground. Many of the stocks that performed the worst were the smallest names, which are going to have less weight in the reconstructed ETF.
The rebalancing has nothing to do with fundamentals, so it can create some very good opportunities, but many investors are puzzled about why their favorite names are acting so poorly. This will be finished at the close on Friday, and then we should revert to more logical action.
This is a tough market right now due to the rebalancing and ongoing narrowness. Some important inflation news coming on Friday morning could also shake things up.
There is some substantial mispricing in individual stocks, which makes me optimistic, but this poor action can continue for a while. Patience is needed, but opportunities are developing.
Have a good evening. I’ll see you on Thursday morning.
At the time of publication, Rev Shark had no positions in any securities mentioned.
