There Will Be Huge Volume Friday, But It Has Nothing to Do With the Debate Shocker
While the market is digesting the political situation, attention will shift to the PCE inflation report and the Russell index reconstitution. Here's my game plan.
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The presidential debate on Thursday night was a shocker. Conventional wisdom was that it was unlikely to move the needle much, but President Biden did so poorly that there is now an increased likelihood he will no longer be the Democratic nominee. There is even talk about invoking the 25th Amendment to remove him from office.
What is most surprising to me is that many in the media and the Democratic party tried so hard for so long to cover up his struggles. It was a tremendous disservice to voters, in my view.
What happens next will be of great interest politically, but the market's immediate reaction is positive so far. The dollar and bitcoin exhibited strength overnight, and futures were higher early on Friday morning, with the Magnificent Seven stocks leading the way.
While the market is digesting the shocking shift in the political situation, attention will shift to the PCE inflation report, which will be released at 8.30 a.m. ET. There has been growing concern about a slowing economy, and if PCE is even slightly softer than expected, it may move up the timing of a Fed interest-rate cut.
The other big news on Friday is that it will be the largest volume day of the year due to the reconstitution of the various Russell indexes and a number of ETFs. At the close, hundreds of large blocks will be traded as brokers transfer positions to various index funds and ETFs.
It isn't easy to game this index action in the short term, but one thing that is happening is that most of the Magnificent Seven names are now even larger components of various indexes due to price appreciation. This means that capitalization-weighted indexes need to own even more of these shares and will continue to push them higher.
Index rebalancing causes significant distortion in pricing as it has nothing to do with valuations or technical conditions. Some good opportunities are being created for stock pickers, but the market will take a while to digest the index changes.
My game plan is to dig for stocks impacted by indexing and have upcoming catalysts to help them revert to more reasonable pricing.
We have a positive open, but data is coming out at 8.30 am ET.
At the time of publication, Rev Shark had no positions in any securities mentioned.
