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Rebalancing the Russell 2000

Thursday, 31 May 2007 | 6:53 PM ET

Cramer, ever the master of trading strategies, has come up with what looks like another winner. This one is based on the rebalance of the Russell Indexes (yes, in this case indexes, and not indices – it’s a Russell thing).

Russell Rebalance (pt.1)
Mad Money's Jim Cramer predicts which stocks will be added to the Russell 2000 on the June 22 rebalance



Every year stocks that don’t live up to Russell’s standards have to be replaced with new names, and those new names have the potential to jump in price just based on the attention alone. This year’s adjustments are announced June 22 (though decisions are made based on today’s numbers, May 31).

The best part? Russell lays out the rules for which companies are eligible and which aren’t. That makes an educated guess on just who will make the cut entirely possible, Cramer says, and that could make you mad money.

Russell Rebalance (pt.2)
Mad Money's Jim Cramer predicts which stocks will be added to the Russell 2000 on the June 22 rebalance



Now, there’s no guarantee that a new addition to the Russell 2000, a small-cap index and the one Cramer focused on today, means the stock will go up. Actually, prices only go up a little more than half the time. But the ones that do average a 40% gain, and that’s why finding the best stocks in the group is worth it to Cramer.

Last year’s top five stocks have soared over 100% since being added: Sigma Designs, Matrix Services, Bradley Pharmaceuticals, Jones Soda and Advanced Magnetics. Notice they’re all from different sectors. Cramer says the common bond is the addition to the index.

So how do you know if a company is eligible for the Russell 2000? Check the market capitalization. Prudential estimated the market cap range for this year is between $233 million to $3 billion. Also, the company’s stock has to be trading over $1 as of today, it needs to be on a major exchange, and it can’t be an ADR, closed-end fund, LLC or royalty trust.

We know stocks are coming off the index, and we know the rules for adding new stocks, so Cramer thinks it won’t be too hard to predict who’s coming and who’s going.

Bottom Line: Stick with Cramer and he’ll tell you about his three favorite stocks that should get added to the Russell 2000 come June 22. Trust him, this is one trade you don’t want to miss.

Questions? Comments? madmoney@cnbc.com

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