Juneteenth stock-market pause precedes potential end-of-week trading flurry. What investors need to know.

By Isabel Wang

Weak market breadth, triple witching and index rebalancing could add to stock volatility this week

U.S. stocks are on a seemingly unstoppable record-setting rally, but investor excitement appears to be taking a backseat in what could be a quiet, holiday-shortened week bifurcated by the Juneteenth observance on Wednesday.

The New York Stock Exchange and the Nasdaq are closed on Wednesday, June 19 to commemorate the ending of slavery in the United States, as are U.S. bond markets. Juneteenth has been observed in Black communities since as far back as the 19th century, but it wasn't until 2021 that President Joe Biden officially made it a federal holiday.

See: Is the stock market closed on Juneteenth? Will the post office be open?

The summer months typically see subdued trading volume and mostly sideways movement in the stock market as children are out of school for the summer and investors are going on vacation. But after a handful of Big Tech names again acted as a driver of the stock rally, which highlighted weak market breadth, analysts caution that there might be increased volatility that could bring near-term downward pressure to U.S. stocks.

For a healthy stock-market rally to happen, investors may want to see "a big trading volume" and "the number of stock advancers outpacing decliners by a pretty wide margin" in the market, said Steve Sosnick, chief strategist at Interactive Brokers. "But we've gotten neither," he said.

Since the start of June, there has been only one trading day where the total trading volume for U.S. stocks on the New York Stock Exchange, Nasdaq, NYSE American and NYSE Arca was larger than the rolling year-to-date average, according to Dow Jones Market data (see chart below).

Over the past four weeks, there have been seven trading sessions where the S&P 500 traded higher on a day when more stocks finished lower than higher. That is one of the largest number of negative divergences in a 20-trading-day rolling period since 1990, according to Bespoke Investment Group.

Typically, positive market breadth occurs when more stocks are advancing than are declining, which helps confirm the uptrend in the stock market. A disproportionate number of declining stocks may indicate bearish momentum and a downtrend in the benchmark index.

"These are among the reasons why you see people starting to wonder how sustainable the rally is because it continues to be a fairly shortlist of names that's really leading things," Sosnick told MarketWatch via phone on Monday.

See: 'Don't sell a dull market short' is the advice stock investors need right now

June is usually a quiet month for U.S. financial markets, with stock trading volumes tapering off as summer nears. However, this holiday-shortened week also presents an uncertainty known as "triple witching" - an event in which stock options, stock-index futures and stock-index options contracts all expire on the same day. It sometimes leads to heightened volatility on the days leading up to the event itself, said Bill Hornbarger, chief investment officer at Benjamin F. Edwards.

Friday's "triple witching" expiration event also coincides with the quarterly rebalancing of some of the most popular U.S. benchmark indexes and exchange-traded funds.

One of the world's most prominent technology ETFs looked to be heading for a major shakeup as Microsoft Corp. (MSFT) will retain the top weighting in the S&P Technology Select Sector Index, while Nvidia Corp. (NVDA) will rise to the No. 2 weighting, eclipsing Apple Inc. (AAPL).

MarketWatch reported on Monday the $71 billion Technology Select Sector SPDR ETF XLK, which tracks the index, could be forced to buy nearly $10 billion worth of Nvidia shares later this week, while selling more than $11 billion worth of Apple shares. The rebalancing will see Microsoft and Nvidia both wind up with weightings of roughly 21% in the fund once the new weightings are officially implemented at market close on Friday, while Apple's weighting is expected to drop to 4.5% from around 22%.

See: Popular tech ETF forced to dump Apple stock, buy Nvidia in upcoming rebalancing

As a result, Sosnick said he expects to see "a big flurry" of trading volume on Friday following some "fairly light" trading activities throughout the holiday-shortened week.

"But right now it's a handful of stocks leading the market higher, so as long as people feel like continuing to chase after them or put money into them, things could get really hairy very quickly," he said.

Also adding to the uncertainty this week is a lack of macroeconomic catalysts such as key economic data releases or highly-watched earnings reports to boost stock trading volume.

"When you have a fairly quiet time with few [macro] catalysts for volume, but a big potential rebalance, that's when stuff can get a little wonky," Sosnick said. "Market emotion tends to stay in motion until acted upon by an outside force."

The Nasdaq Composite and the S&P 500 notched fresh records on Tuesday afternoon after May retail-sales data showed sales at retailers were weaker than expected last month. The S&P 500 SPX rose 0.3%, while the Dow Jones Industrial Average DJIA was up 0.2% and the Nasdaq COMP ended nearly flat, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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06-18-24 1612ET

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