Every year on the last Friday in June, the Russell indices are rebalanced. New stocks are added, old ones dropped and the weightings adjusted. There is roughly $9 trillion tied to the Russell indices in the U.S. and there also are overseas indices such as the Russell FTSE indices.
The rebalancing likely will result in trades of more than $170 billion at the closing bell here on Friday. There will be some huge blocks crossed and it will be one of the highest volume days of the year. Recent initial public offerings (IPOs) such as Lyft Inc. (LYFT) , Uber Technologies Inc. (UBER) and Beyond Meat Inc. (BYND) will be impacted as they are added to the indices.
A list of the hundreds of stocks impacted by the reconstitution can be found on the Russell website here.
There are many sophisticated traders who try to game the additions and deletions. It is a complex business as the list of stocks impacted is known well in advance. The brokers who need to acquire the shares for their index funds don't just buy a huge block at the close. They accumulate over time or might even use short strategies. There is no easy way to know if there is a correlation between the number of shares added to the indices and the impact on the price.
The most important thing to keep in mind is that this has nothing to do with the individual merits of a stock. It is just pure supply and demand and can corrupt the charts temporarily as well. Don't read anything significant into this action here on Friday.
There will be some reverberations from the rebalancing next week, but the main driver will be the G-20 economic meeting in Japan. The market has been surprisingly optimistic about some progress on a China-U.S. trade deal despite a number of indications that any substantial progress will be difficult. The market appears to be anticipating some signs of progress but does not expect that a deal will be done for weeks or months.
Another issue impacting the market is that the second quarter of the year comes to a close next week. This has been the best June in 80 years, which is likely to trigger some moves by fund managers as they close their books.
The bulls will be optimistic that this strong momentum will continue and will provide a tailwind for more gains while the bears will argue that it is unsustainable and will lead to profit taking. Many will feel they can predict what happens next, but I don't believe there is any way to know where things are headed from here. The best approach is to stay focused on the price action and let it be your guide.
We have some interesting cross-currents at work here on Friday but the trading is likely to be more random than usual with the Russell index rebalancing. Make sure you plan your strategy accordingly.