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S&P 500 Rebalancing at Close; Hedge Funds Underperform...Again!

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Markets: heavy volume on quadruple witching, but volatility low. Markets dropped in the first half hour — S&P 500 paid out a dividend last night, so some might have sold at the open.

Big trade this afternoon will be the quarterly rebalancing in the S&P 500...three big names will have stock to sell at the close because they have had sizable buybacks this quarter and will be shrinking the size of their float in the S&P 500: Exxon Mobil, AT&T, and Pfizer.

What's next? The strong advance/decline line for the past few weeks is a positive short-term indicator...with momentum this strong, markets are usually higher a couple weeks later.

Speaking of a couple weeks: it's all about the end of the quarter. And what a quarter it has been, so far: we are up 34 out of 51 trading days...that is 66 percent of the time.

There are 10 trading days left in the quarter...the S&P 500 is up 10 percent for the year. Almost no hedge funds are up 10 percent.

You doubt me? According to Hedge Fund Research, long/short funds are up 4.95 percent so far this quarter. Macro/CTA funds (many of these are commodity-based funds) are up only 0.18 percent.

In other words, the average long/short fund is showing returns that are HALF the size of the S&P 500, the standard bogey for most funds.

For yet another quarter.

What it means: a higher chance of performance chasing going into the close of the quarter.

Banks: what's next? The KBW Bank Index is up 12 percent this quarter. Now that the bank capital return plans are out, is it time to take profits? That would seem to make sense, but when I ran it buy some bank traders, I didn't get a lot of agreement. A couple comments:

"We're getting a lot of uncertainty behind us in these banks, and they really aren't that expensive under historical terms...any breather will be short in my opinion...."

"Remember, we're only about a year or two away from rates going higher...these banks are running lean and mean, rates go higher and the top line growth will go right to the bottom line. I'm seeing people paying up for names now for what they could earn two years down the road."

"I don think fins are for sale but I think there is going to be a separation...buy C and BAC and sell JPMeven WFC."

By CNBC's Bob Pisani

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Symbol
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Change
%Change
S&P 500
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XOM
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T
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PFE
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KBW BANK
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C
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BAC
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JPM
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WFC
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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street