FRI. JUN. 27 THOUGHTS

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. This year, 278 companies will be added. 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. Many 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 rally on the close. In the rare year (and this may be one of them), the desire of fund managers to exit their positions in select stocks outweighs the buying of Russell managers and stocks fall on the close. Most years, it is totally offset 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. 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 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 Visa (V). And remember to expect absolutely nothing out of it, but definitely hope for the best because it is occasionally the most profitable day of the year for many day traders.

Overnight, markets expectedly followed Wall Street’s lead in finishing sharply lower across the board in Europe and Asia. Oil is at yet another new high in early morning trading. Today is one of those days in which anything can happen. That is the case every day, but really today. There seems to be no fear in the markets right now as measured by the VIX thus the tone really is not all that bad early so the most likely scenario is that we get a little short covering rally ahead of a week in which many people will be on vacation particularly when combined with the Russell rebalance and baseball day at the two stadiums in New York. However, if disturbing rumors envelop a financial or two and/or oil prices spin out of control to the upside, it could be a very bad day.

AEL- crushed yesterday; looking to short below yesterday’s 7.90 low if it gets there.

AXL- crushed yesterday; looking to short below 8.50ish if it gets there.

STAR- has been hit badly last couple of days; looking to short below 12.50 if it gets there.

TSL- preannounced respectable earnings; stock is down anyway. Looking to buy it thru unchanged.

CBL- crushed yesterday; looking to short thru 23 if it gets there.

ESLR- priced its secondary at 9.50. Stock is trading at 10.40 as of this writing. Looking to short below 10.25 if it gets there, particularly pre-open.

MER- rumors of more write-downs and share offerings. Pre-morning low is 31.80; that’d seem like the spot to short it if it gets there.

LEH/GS/MER- watch for contra moves to MER, i.e. if they all open down and one of these pops through, likely a buy.

ANDE- way up on earnings; likely an A-B-A2 of some sort.

PAYX- decent earnings; stock traded higher last night. Likely a short thru unch if it gets there.

KBH- atrocious earnings. Stock not down all that much in pre-open…possible A-B-A2 to long side and even better thru unch if it opens down.

Good luck today.