Not for the Faint of Heart: Trading Tomorrow
Tomorrow marks the rebalancing of the Russell Indices on which many domestic equity market participants base their sector weightings, stock selections, and overall portfolio exposures. Given not only the overall turmoil in equity markets to start 2022 but also the major drivers of this disruption, this rebalancing season probably will result in some highly peculiar trading activity to say the least.
This probable outsized volatility comes on the heels of rather hectic trading last week, 6/13- 6/17. Last week culminated with Friday’s “quadruple witching,” which describes a trading day when stock options, stock index options, single stock futures, and stock index futures all expire at the close of trading. The lead up to quadruple witching likely drove heightened volume last week as the 645+ million shares traded of the SPDR S&P 500 ETF Trust (SPY) represented a 61% increase over SPY’s cumulative trading for the prior week. Thus far this week trading lagged that of last week, but wait and see what happens tomorrow (Friday, 6/24).
Among the peculiarities we will experience this coming Friday: Meta [aka Facebook (FB)], Netflix (NFLX), and PayPal (PYPL), making their way into the Russell 1000 Value Index. Substantially reduced weightings in the Russell 1000 Growth Index for these three companies offsets the move to the value index. While the combined market capitalization levels of these three stocks at ~$640 billion falls well below what it did to start 2022, this move along probably will generate a few ripples in trading tomorrow.
The Russell 1000 Value Index overall will see a relatively significant reweighting from Health Care to Communication Services, which includes FB and NFLX, as shown in the following table below. Logically, an increase for the Health Care sector in the growth index supplants a reduction in exposure to the Communication Services sector. The magnitude of investment capital dedicated to value strategies thus far in 2022 dwarfs that of growth, hence the index movement of the above-noted once high-flying growth names FB, NFLX, and PYPL (among others).
My advice to those not inclined to move quickly in and out of their stock positions or that have yet to generate well-defined and well-thought buy-and-sell lists. Don’t watch. If you choose to watch, give the likely inexplicable market moves at least a week to sort themselves out. Thus far 2022 already offers among the weirdest trading years on record. Try not to make it any weirder by falling victim to the technicalities of index rebalancing that themselves are only adjusting to 2022’s weirdness.