'A critical readjustment phase' - is how a few analysts are finally starting to describe the market, which actually has been in a rotating readjustment sine I warned investors to seriously lighten-up in January's unsustainable parabolic thrust; to the point of my finally issuing a 'crash-alert' warning for an upcoming big February break (followed by calls for a 'ragged' pattern; to say the least what has transpired throughout the first half of 2018).  

Now that we've gone through a half-year of 'rinse & repeat' cycles; most of which I'm honored to have reasonably identified in terms of probable S&P patterns; now, some come forth to suggest we're going to see 'adjustment'in the market. We sure are, and we sure did. Most deluded themselves to seeing strength, rather than rotation, through the year's first half; and now a lot of pundits don't want to recognize that the S&P high (for the Trump run we forecast if he won) essentially topped as indicated in January. All the ensuing rallies were glorified short-covering squalls as suspected; and none improved the generally lateral status of the S&P subsequently.  

While some will argue this sets-up a leg-up; I've disputed this technically. It is doubtless that a 'real' trade settlement (and that's not unlikely) would for sure generate another rally, if for no other reason than 'shelved' CapEx or spending plans might be brought forward (surveys showed 'confidence' by businessmen dropped dramatically as trade tensions became real). But at the same time any such rebound would run into the 'reallocation' challenge that I've address and which (for some stocks) will vary from perceptions of a simple exodus from lesser-capitalized ETF's, and so on. 

As a few analysts have become aware of this, they tended to reasonably fear what we talked about: shifts between stocks like Facebook, Google, Verizon, Intel, Micron and of course AT&T; all which will be impacted on the short-term when that happens in August and September (announced later in July). In fact that's why my new bullishness on AT&T was tempered a bit; suggesting scaling-in in the 29-32 area with a portion of buying held back until we see reactions then (at lower or even higher price levels).  

So what's new? Potentially a big fizzle not the offset one might surmise. It takes you right back to MSCI. While already stated, State Street has not had many realize they may amplify the known shuffle that's forthcoming, and thus exaggerate rather than mitigate some 'restraint' a number of S&P analysts desire; including worries about Google or Facebook (I have real concerns about those two for different reasons we've explored).

(This also hints not just at volatility; but Multiples related to 'media' more so than Telecom. Odd-man-out for now is Verizon; maybe they should try to buy CBS? Seriously Verizon probably will be pressed to make a move. )

This new State Street Communications Sector ETF (XLC) finished its first full week Friday; and did over 120,000 shares (not bad with awareness so scant). Effective in late September they will also re-balance the XLK Tech ETF we already monitor, and the XLY Consumer Discretionary ETF. The problem here is that with over 90% of money managers falling-back more on MSCI's allocation metrics, rather than doing their own work (some will; many won't), the influence of MSCI's funds on the holdings detaches from merit to a degree, and results in similar behavior by many mangers. Some (as a for-instance) may decide Verizon has a better capitalization picture; while others view AT&T with more potential; if their minds open to how Ma Bell will transform into a media company; typically carrying higher P/E's.  

This will probably distort Google more than Facebook; Verizon more so than AT&T; and actually bolster Micron and Intel. But because these stock segments are such a large percentage of the entire S&P these days; what could happen might not be smooth and create volatility for the entire group of such stocks (IT and Communications reallocations); and for the S&P itself. This has broad implications; and really is something new. Here are the exact words from the State Street press release:

'The reclassification of the GSCI (Global Industry Classification Standard) structure will transform the existing Telecommunications Services sector, expanding (odd word since there are multiple ETF's) it to include selected companies from Information Technology & Consumer Discretionary sectors. It will be renamed Communication Services effective September 21, 2018.'  

(Confusing at first so here's my preliminary interpretation: the ETF known as XLC is already trading; not awaiting September. We've yet to hear the apportionment and specifics; which await later July and in August. Then it becomes a decision-making process by a myriad of money managers on a global basis. XLC alone, which we will track starting now, represents just a smidgen... like 10% .. of the entire S&P capitalization.. that's quite a lot on it's on....I'm referring just to the estimated influence of the ETF separate as well as aside or in addition to, movements in the component stocks. It's an example of why structural shifts in ETF allocation matter beyond analyzing the individual issues in the 'presumed' diversified ETF itself.)  

In sum: sorry about the complexity of this; but I believe it might just be the pivotal influence on the market this Summer; aside what we already know about geopolitical, Oil, currency and trade-related issues. Not that any will be unable to move the market on their own (they surely will); but because this will potentially shake the S&P by baking formerly different ingredients into brand new cakes (same ingredients; shifted flavors and frostings).