FRI. JUN. 25- Russell Day

On the last Friday of every June comes a rather unique phenomenon: the Russell rebalancing. The Russell 3000 is an index which tracks 3,000 of the largest stocks in the U.S.; approximately 98% of all investable U.S. stocks are included in the index. The Russell Company adds stocks to its indexes on a quarterly basis, but it deletes stocks just once a year. Below is the list:

http://www.russell.com/indexes/membership/Reconstitution/Reconstitution_changes.aspx

Index and various asset managers try to reconfigure their own portfolios to accurately show the make-up of the new grouping of stocks in the index. Many Russell or small-cap managers in particular are forced to do this reconfiguration by the close of business today. Thus, on the close, volume often surges because of the influx and outflow of monies in the stocks going in and coming out, respectively. Most years, there will be millions of shares to buy on the close of the Russell stocks which are offset by, say, institutions which use the volume to exit positions of stocks that they no longer wish to hold thus stocks have no reaction on the close. Occasionally, the demand is not sopped up and stocks can spike sharply on these rebalance days as happened on the close in 2000 and 2001 (my two best trading days in the decade of the 2000’s) with stocks moving multiple points on the last tick of the day. Of course, every so often, the desire of fund managers to exit their positions in select stocks outweighs the buying of Russell managers and stocks fall on the close. However, that scenario is unlikely this year as the market’s tone has been largely neutral. Most years, the whole thing is a total neutral because everybody knows everything. All of this in mind, short of entering orders on every stock going into the index, the best strategy for the close is to watch for order imbalances and simply play the biggest ones by placing offsetting orders far away from prevailing market prices on the bell. The ‘fun’ ones often occur first, i.e. the ones which have 75,000 to buy or sell and they’ve traded 2,500 shares on the day. But as noted the ones that work best are the stocks that have the biggest imbalances because those are hardest to offset so spend time looking for things like multimillion shares imbalances in stocks like Berkshire Hathaway (BRK.A) as the ban on the inclusion of that stock into its index has been lifted. And remember to expect absolutely nothing out of it, but definitely hope for the best because it occasionally provides a chance for significant profit for prepared day traders.

Markets overnight were broadly lower throughout the world with Tokyo down 1.9% and the European bourses about 0.6% across the board. Oil and gold are both slightly higher with the dollar and bonds quiet. Futures are modestly ahead as a preliminary deal was reached over financial reform in Congress- a deal which is not the worst case scenario originally envisioned so there’s a notable uptick in financials. Look for the upside bias to maintain itself throughout the day with action bookmarked at the beginning and end of the day. There will be lots of trading in the financials, the drillers, and big cap tech in particular on the reform, continued AAPL buzz, and off of BP headlines. It’ll likely be slow mid-day and then pick up again ahead of the Russell rebalance on the close as well as the fact this is the last day of trading for the quarter for many traders who will go on vacation next week ahead of the Independence Day holiday to make it 1 ½ weeks off as it’s the last day of school for many kids. Trade accordingly; today is one of those days where little may (and will likely) happen but where one truly has to be on guard with all of the newsflow and the rebalance.

Reiterating-

If the whole story is not there -

If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.

If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-


Good- The following stocks have good news and/or a strong technical pattern

ORCL- good earnings

A.CN- decent earnings

HRB- decent earnings

TIBX- good earnings

AOS- decent earnings

IDSA- closed near a high after posting positive revenue guidance



Bad-The following stocks have bad news and/or a weak technical pattern

RIMM- poor earnings

FINL- poor earnings

LIBR- reversed after 1 ½ days of huge gains in closing near a low

RIG, APC, DO- closed near a low

BBBY- closed near a low after posting bad earnings

DRI- closed near a low after posting bad earnings

X- closed near a low

CLF- closed near a low

DVN- closed near a low

POT- closed near a low

AVAV- poor earnings

ASH- closed near a low

MAG- closed near a low after receiving an NYSE delisting notice as well as being removed from the S&P 600

JOE- mentioned on “Mad Money” last night in the “Sell Block”

AOD- declared disappointing dividend

Earnings:

FRI JUN 25 BEFORE

KBH


www.epiphanytrading.com


Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner