Why stock-market volatility may rise Friday due to Russell rebalancing

Investors are preparing for a strong trading day on Friday due to the rebalancing of Russell’s U.S. equities, an annual replenishment that comes amid high stock market volatility.

Global index provider FTSE Russell began the rebalancing process on May 6, or the so-called rating day, to ensure that the indices accurately reflect the U.S. stock market. The reconstitution, scheduled for after the market close on Friday, is often among the most important trading days of the year, Jeffery Equity strategist Steven DeSanctis told MarketWatch last month as the process began.

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About $ 12 trillion in investor assets is compared to U.S. Russell indices, according to a FTSE Russell statement in early June. Higher trading volume linked to rebalancing could exacerbate stock market volatility, which has been rising as investors cope with rising inflation, rising interest rates and concerns about a slowdown. of the American economy.

Volume is likely to rise toward the close on Friday, according to Jay Woods, chief market strategist at DriveWealth, a New York Stock Exchange stockbroker.

“It’s all about closure,” Woods said by telephone Wednesday. “This closing business is the most important trade for all these mutual funds and ETFs” before rebalancing, as it serves as a measure of their performance, he said.

The CBOE VIX volatility index,
was trading around Wednesday afternoon 29th, well above its 200-day moving average of 23.5, according to FactSet data, in the latest check.

The US stock market opened lower on Wednesday, but the Dow Jones Industrial Average DJIA
+ 0.49%,
the S&P 500 SPX,
+ 0.65%
and Nasdaq Composite COMP,
+ 0.76%
they showed gains in the afternoon trade, according to FactSet data.

Meanwhile, the Russell 2000 RUT Index,
+ 0.13%,
consisting of small-cap stocks in the U.S., rose modestly on Wednesday afternoon, according to FactSet data, in the latest check. The index has fallen more than 24% this year to Tuesday.

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Under Russell’s remodeling, a “good chunk” of Meta Platforms Inc.’s META, Facebook’s parent company,
+ 0.69%
The shares will move to the Russell 1000 Value Index of the Russell 1000 Growth Index, according to a Jefferies note dated June 5th. Shares of Meta have fallen about 53% in the 12 months to Tuesday, FactSet data show.

Growth stocks have been affected in 2022. The Russell 1000 RLG growth index,
+ 0.63%
it has fallen nearly 29% this year to Tuesday, with losses exceeding the Russell 1000 Value Index RLV,
+ 0.25%
14% drop, according to FactSet.

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As part of the rebalancing, several energy companies were scheduled to move to the large-cap Russell 1000 index from the small-cap Russell 2000 index, according to preliminary results highlighted in the June 3 statement. FTSE Russell. They include Antero Resources Corp. AR,
Chesapeake Energy Corp. CHK,
Ovintiv Inc. OVV
PDC Energy Inc. PDCE,
Range Resources Corp. RRC,
i Southwestern Energy Co. SWN,
+ 0.22%.

In its June 5 report, Jefferies noted “major sectoral changes” in the Russell 2000 Value Index, where energy is expected to decrease in weight while becoming a larger part of the value. Russell 2000 growth rate. The change comes when energy stocks soared this year, although the sector has sold out this month.

For example, the energy sector of the S&P 500 SP500.10,
it has risen more than 33% in 2022, but has fallen by about 14% so far in June, according to FactSet data based on trading on Wednesday afternoon.

“With the recent sale of energy, cyclicals are lagging behind in June,” DeSanctis said in a June 20 Jefferies research note. “The industry is seeing sales pressure coming from ETFs, and perhaps even from securities managers, such as the Group’s group. The weight falls significantly on their indices due to the rebalancing of FTSE Russell.”

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