What Will Drive the Market Now?
Rotation continues, but a lack of catalysts is a major problem.
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Following a chaotic week and the drama of Micron’s (MU) earnings, investors enjoyed a small relief bounce on Friday that was hidden by more rotational action.
The Nasdaq 100 (QQQ) lagged badly with a loss of 1.4% but breadth was 58% positive and 335 stocks hit new highs. Some of the most beaten-down names, such as Microsoft (MSFT), Palantir Technologies (PLTR), and Netflix (NFLX), came off recent lows, but this did not have the feel of a sustained bounce.
The Russell Rebalance Creates Friday Noise
The action on Friday is unusual because hundreds of huge blocks crossed at the close due to the rebalancing of the Russell indexes. This is typically the largest volume day of the year but it is driven solely by brokers delivering shares to the index funds that have to own everything in certain indexes in the correct percentages. It is a very complicated procedure and it causes some unusual volatility.
There will be some unwind of this next week in various stocks but there is no way to know which ones and to what extent. If you watch closely you’ll see quite a few stocks moving around right before and after the closing bell.
What Drives the Market Now?
I started off this week with concern that we no longer have any major catalysts to keep driving the market. The Iran situation is largely settled, the SpaceX (SPCX) IPO is in the rearview mirror, and the new Fed Chair has held his first press conference and is in no rush to cut interest rates. This week the big catalyst was Micron earnings and now that is being digested. The final event was the Russell rebalancing.
What is there to drive the market from this point? We are moving into the dog days of summer and trading will slow around the Fourth of July holiday. We still have a few weeks before second-quarter earnings.
The most positive aspect of the recent market action is the rotation action. While technology has been under heavy pressure and semiconductors wildly volatile, the biotechnology sector has ripped higher. It is up seven sessions in a row and hit another new all-time high on Friday.
Too many traders are still wrestling with technology and trying to bottom-fish broken charts. The action is elsewhere but they are so used to focusing on the Mag 7 and AI-adjacent names that they are missing out. Biotech is now a bit extended but it is still nowhere near as frothy as technology.
Strategy
As I’ve discussed, my strategy has been to go heavy on cash, trade tight, and stay selective. I have little technology exposure right now and I’m working hard to keep accounts close to highs.
I anticipate a tough slog next week. I’m going to keep time frames short and don’t anticipate building any big positions. As we move closer to earnings I’ll do more positioning but without any big catalysts next week it will be tricky trading.
Have a great weekend. I’ll see you on Monday.
Position: None
