The market looks ready to continue yesterday's strong momentum, but the action will likely by dominated by some structural changes that have nothing to do with fundamentals and technical.
Today is "quadruple witching," when options on individual stocks and futures expire. That always results in a surge in volume as positions are closed or rolled over. There also will be some normal rebalancing of the indices for changes that have occurred in the third quarter, but what is unusual today is that there is a major change in something called the Global Industry Classification Standard (GICS).
The GICS was developed by MSCI and Standard & Poors and classifies stocks in 11 sectors, 24 industry groups, 68 industries and 157 sub-industries. Due to the growth in the FAANG names Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet/Google (GOOG) , (GOOGL) , the Information Technology sector has grown to around 26.4% of the S&P 500. That is simply too big, so S&P is shifting some stocks around to new sectors.
Alphabet, Facebook, Twitter (TWTR) , PayPal (TWTR) and a couple gaming companies are moving from the technology index to a an expanded group now called "Communications Services." Netflix is also moving to this group from the consumer discretionary sector.
There are a number of other changes, but what is important to understand is that many billions of dollars are traded based on these sectors. Large funds and ETFs will need to make some major changes in their holdings to maintain a certain weight in various sectors and stocks.
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Much of the buying and selling in some major stocks today will be driven by this rebalancing, as well as quadruple witching and the normal quarterly rebalancing. Volume will be huge -- and the movement in many stocks will seem quite random.
This event is very well anticipated by major funds and there are complex algorithms in place that will move billions of dollars around as needed. It would be a mistake to try to use this movement to draw conclusions about the technical health of the market.
Aside from this giant administrative task, the overall market looks quite healthy. The action yesterday tapped anticipatory bears once again. The pot sector has ignited speculative interest -- and traders are looking hard for the next candidate to make a big move.
There will be highly unusual, and big volume, action today. But it is meaningless in the bigger scheme of things. Don't' be misled by what is occurring.