The economic news has been terrible this week (housing, jobs), but the S&P 500 is up 2.4 percent. How to account for that? Some point to the reduced headline risk in Europe (Germany has had an amazing week, it's only about 1 percent from a 52-week high!), and perhaps reduced headline risk from BP helped at the margins.
But the driving factor is likely the need to get some performance out of the end of the quarter (S&P 500 down 4.6 percent!) and the year (S&P 500 is flat). Most long/short equity hedge fund traders have little to show for their efforts for the year.
But that is a short-term forecast. Going into July the Street is almost unanimous:
1) earnings estimates are too high and will come down;
2) housing and jobs are not showing the growth needed to appreciably lift the economy;
3) financial regulatory reform and higher taxes coming are a negative for stocks.
For the week: Dow Industrials up 2.3 percent.
Next Friday, June 25 the Russell indexes will go through their yearly rebalancing. This one will likely be a little more volatile than the last few years.
1) 24 companies will be added to the Russell 1000 (there were only 2 last year); the estimated trading value of those 24 adds is $13 billion, according to ITG.
2) the big addition is Berkshire Hathaway , indexers will need to add about $5 billion — about 14 days volume.
3) Some financials like Wells Fargo and General Electric , our parent company, will see their weighting reduced due to the additional weighting of Berkshire in the financials.
4) several companies that are domiciled outside the United States will be allowed go into the Russell — including Ace , Thomson Reuters , Ingersoll Rand , Accenture , and Tyco .
One potential issue: in a thin, summer market, these additions may create more than just volume — they may create price dislocations that might trip the new circuit breakers — at least those stocks (like Berkshire) that are in the S&P 500.
I will be speaking with ITG CEO Bob Gasser at 9:40am ET Monday about the rebalancing and the circuit breakers.
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