Friday's Russell Reconstitution Sets Tone For Next Big Move

The Russell reconstitution on Friday sparked some interesting moves in some of the components being added or deleted.

Many issues that were going to be added to the index sold off sharply on Friday's close, while some issues being deleted spiked higher.

Stocks being added need to be bought and stocks being deleted need to be sold.

If a trader was paying close attention to the NYSE imbalances disseminated at 3:45 p.m. or the Nasdaq imbalances at 3:50 p.m., the moves were telegraphed.

Truly Imbalanced

During the last few reconstitutions, traders were reluctant to take the data at face value, since many of the imbalances flipped at the last second and traders had to scramble to cover and or reverse positions.

But on Friday, the imbalances stayed true to form leaving traders wanting to participate from the event to fade the closing prints and wait to cover in after-hours or premarket trading.

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Two companies that were deleted after they abandoned their U.S domiciles in favor of the U.K., Delphi Automotive DLPH and Liberty Global LBTYA, traded higher in the last 15 minutes of trading on Friday and closed near the highs for the day. Interestingly, these issues closed even higher Monday.

Meanwhile, Tyco International TYC, which was added to the index even though it's headquartered in Switzerland, cascaded nearly $1.00 in late Friday trading. After testing the low from Friday ($44.89), reaching $44.84, Tyco has rebounded to just shy of the level it was trading at when the large sell imbalance was revealed in the upper $45.00 handle.

Traders squaring positions from the imbalances on Friday are having to contend with the noise from the end of quarter window dressing. Portfolio managers are looking to add winners to their portfolio, while shedding losers in order to keep pace with the benchmark indexes.

One big winner for the quarter, Apple AAPL continues to march higher, while one big loser for the quarter, Coach COH is trading near the lows for the quarter as well as four year lows.

Setting The Stage For The Next Big Move

If these events do not add sufficient intrigue to the markets, consider the abbreviated trading week with markets closing early on Thursday and closed on Friday for the Fourth of July holiday.

As a result, non-farm payrolls will be released on Thursday morning and traders will only have until 1:00 p.m. to react to the news. An overwhelmingly positive or negative report could easily ramp up volatility.

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These events, along with the quadruple expiration which took place a few weeks ago, set the table for the next big move in the market. Often expirations are turning points for a change in trend or strong indication the trend will continue in its current direction.

On June 20 (the day of quadruple expiration) the S&P 500 indexes futures posted an all time closing high at 1953.25. Two trading sessions later, the index tantalized investors with a break out to the upside, reaching 1960 then showed signs of weakness by falling 20 handles before recovering.

After forming support at the 1940 level, the index has revisited its all time high, but has not been able to improve on it. In addition, the index made three consecutive highs in this area (1952.50 to 1954 Wednesday through Friday) before rallying to 1956.75 during Monday's session.

Now that the market has identified 1953.25 as a key technical level, traders will be anticipating if the the pause in the action represents a consolidation to move higher or that the index has finally reached a level that has it ripe for correction.