The coming week is the end of the quarter and funds should be window dressing like crazy.
The Russell rebalance was a nonevent at the close on Friday. Volume was high at 10.5 billion shares but well under expectations. There was no volatility and the Russell 2000 actually posted a decent 10-point gain despite a historical trend for weakness. The historical trend for next week is a Russell gain as fund managers adjust positions to complete their rebalance.
The Nasdaq big caps are recovering nicely and Facebook closed at a new high. The rebound in the big caps and biotechs helped lift the Nasdaq over post crash resistance at 6,245.
Several of the big Dow gainers are already surging ahead of the quarter end. With the markets at their recent highs, this suggests the window dressing could be stronger than normal. Fund managers may have been hesitant to put extra cash at work over the last several weeks as the market direction became questionable. Now that the indexes are just a few points under new highs, managers will want to be fully invested for their month end, quarter end and first half end, summary statements.
If this plays out as expected the top 20 stocks, which accounted for the majority of the recent market gains, should account for additional gains next week as those stocks are bought for window dressing purposes.
With the Russell trend positive for next week, the Nasdaq now back over resistance and the big cap Dow/Nasdaq stocks likely to see an increasing number of buyers, we could have a good week or at least the first three days.
July 4th is the following Tuesday and the market will be closed. Monday will be a ghost town and the market should be closed. Since most traders leave early for the holiday, the volume on Thr/Fri/Mon and Wednesday, is going to be extremely low, probably the lowest of the year. That means fund managers will try to get their window dressing done early in the week and close up shop at Wednesday's close. With the equivalent of a 4 to 6 day weekend event risk, I seriously doubt traders will be throwing new money at the market on Thr/Fri.
The Nasdaq could be our sentiment leader next week if it starts closing in on the prior high close at 6,321. Of the big cap tech stocks, Netflix is likely to be the most aggressive gainer because it was the biggest loser in the flash crash.
The Dow gained 144 points on Monday and then gave it all back the rest of the week. The opening gap from Monday was filled at 21,384 and the index did not stray far from that level the rest of the week. The Dow index is weak despite that 144-point gain on Monday. The overextension from the May drop may have run its course. However, if we do get some window dressing in stocks like Boeing, 3M and McDonalds, the Dow could retest its high.
The S&P also filled its gap and also failed to rebound from that level. The index is stuck under resistance at 2,440 and the 2,450 level is going to be hard to cross even if we do move that high. This is the year-end target on the S&P for a lot of analysts, so that becomes a sell trigger every time it is reached.
Note that the day to day price action over the last three weeks has been choppy at best. There is barely any upward movement with the exception of the short squeeze last Monday. Support remains 2,420.
The Russell 2000 is the wild card. If the rest of the rebalance adjustments lift the index to a new high, it could invigorate the market. The Russell has been mostly flat since early December so a new uptrend would be powerful but I am not getting my hopes up.
The economic calendar is full but there are no market moving reports. Everything should just be business as usual and given the impending holiday, the reports will be ignored unless the results are very different from the expectations.
If you are holding any of the top 20 gainers over the last couple months, i would not change a thing. I would not race out and try to get in front of the window dressing because the gains may not be worth the risk. There are a lot of geopolitical uncertainties circulating that could boil up at any time. A 4+ day holiday weekend does carry a lot of event risk because of large crowds at public events like fireworks shows and sporting events. The coming weekend will be a target rich environment for any terrorist that is willing to die to cause death and destruction. We have been fortunate over the last few years that most plots have been foiled. Unfortunately, we have to be right all the time and they only have to be right once.
Enter passively, exit aggressively!
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