End Of Month Games

Although the major indices didn't do much today, there was some absolutely crazy action under the surface in individual stocks due to the rebalancing of the Russell indices. Nasdaq volume was huge at over 3.6 billion shares. Not only did we have some good old fashion markups in some big-cap momentum stocks but there are dozens of extremely thin small-caps that have moves on giant volume due to the Russell rebalancing.

Watching this action really makes you wonder about the "efficient" market and the value of passive index investing. The movement in many of these stocks had absolutely no relationship to their values. It is just wild scrambling by funds to make sure they had enough shares.

Look at the action in extremely thin stocks like ZN, CHBT, ISRL and many more. The ETFs are already inefficiently priced enough and this system of rebalancing turns it into a complete farce.

Unfortunately the folks who passively hold the indices aren't even aware of how these big spikes in new additions to the indices come out of their pockets. You now have the Russell 2000 holding shares of Zion at $13.30 when just yesterday you could have bought it for $7. If Zion reverses, that money comes right out of the pockets of the folks who hold the index.

Many of these moves will be reversed very quickly, so there is opportunity if you have a tolerance for a high level of risk and are able to find some shares to borrow. I just hope we won't have to hear how these big moves are legitimate and aren't a form of manipulation.

We still have two more trading days left in the quarter but I suspect that trading will cool off quickly next week. The games have been played and now the positioning for the third quarter will start to kick in.

It is extremely important that you not read too much into this action. It has nothing to do with the economy or fundamentals. This action isn't telling us anything other than it is the end of the quarter and time to adjust the books.

It did help technically to have this strength on good volume but you can't forget the context. The market has not cured itself of the weakness of the last couple weeks. It has had a respite and it may continue to improve, but nothing has happened yet to turn the tide back up.