The High Risk, High Reward Of Trading The Russell Rebalancing

Once a year on the fourth Friday of June, the Russell 1000, Russell 2000, Russell 3000 and other Russell indexes are rebalanced or reconstituted.

Since the Russell US Indexes are designed to reflect changes in the U.S. equity market, the process is completed to ensure the indexes have an accurate representation of changes in the economy.

What Happens: Several investors do hundreds of hours of preparation for the major event and have developed sophisticated algorithms and trading systems to capitalize on the occurrence.

An important component of the rebalancing is redefining between large, mid and small-capitalization so that companies are designated to the proper index depending on the increase or decrease in their market capitalization over the year.

Finally, companies are analyzed to determine where they should be categorized in the investment style range.

The Russell Rebalancing Process: During the “ranking” month of May, all eligible U.S. companies are researched to evaluate what the preliminary Russell reconstitution portfolio will be. This year it was announced on May 6.

June is the “transition” month, and the preliminary reconstitution portfolio is announced to investors on the three Fridays preceding the actual rebalancing. This year, the dates were June 3, 10 and 17.

At the close of Friday’s session is when it all takes place and instigates excess volatility in the issues that will be involved in the rebalancing.

How To Trade It: Unless you are doing major long-term research similar to the big boys, is it very difficult to make the day-to-day calculations and necessary adjustments that are needed to take and manage long-term positions.

Large amounts of capital are required to hold the positions necessary to properly capitalize on the event.

On Friday’s PreMarket Prep show, co-host Dennis Dick, who has been trading the rebalancing over the last several years, discussed his approach to this high-risk and high-reward event.

Dick’s Approach: In the clip below, Dick will explain why he does not try to anticipate the moves ahead of time, as imbalances can flip in the final minute of the session.

The reason for that is market participants in the issue at hand may come in at the last second to take advantage of or offset the extraordinarily large volume print on the close.

The discussion on the Russell rebalancing from Friday’s show can be found here:

Photo via Shutterstock.