The indices are indicating a quiet start to the day here on Friday, but it is likely to be the highest volume day of the year. At the close, the Russell indices -- most notably the Russell 2000 small-cap index -- will be reconstituted with hundreds of stocks being added, deleted and rebalanced. There will be huge blocks of stocks traded as the brokers who have been accumulating the shares transfer them to the various indices.
Unfortunately for market players, this action doesn't offer much opportunity. The action is not easily played as there are a variety of methods used to accumulate the shares. Just because a stock is being added to the indices does not mean that it is going to run higher today.
The market has been quite challenging recently for market players who have been looking to time a market reversal. Despite the sharp rise in Covid-19 cases and indications of continued economic issues, the stock market has shrugged. The focus has been on stock picking and speculative trading and that has kept overall market sentiment positive. Ironically, the fact that so many market players are looking for a reversal has helped to keep the trend positive.
The Russell index rebalancing will help to keep the focus on individual stocks rather than the indices, but that will set up conditions for reversals next week as the second quarter comes to a close.
One issue that is likely to have a market impact next week is rebalancing by pension plans. Quarter rebalancing impacts many billions of dollars. With equities rising sharply since the end of the first quarter on March 30, many pension funds now will be overweight equities versus bonds. There likely will be a reduction of equity positions as the quarter comes to an end, which could cause the sort of selling pressure that bears have been anticipating.
Despite these big rebalancing moves there should continue to be a strong appetite for speculative trading. Small traders have been successful lately, they still have cash and they don't go away until they suffer sustained losses. They will be beating the bushes looking for the next hot play. If you are playing this game, keep an eye on hot sectors and don't stick around for long.
There will be plenty of headlines again here on Friday about the rising number of Covid-19 cases, but this market is focused on other things right now. At some point that news will have more of a market impact, but it isn't likely to be a significant driving force as the end-of-quarter games are played.