Trader Talk

Energy Gains Give S&P Needed Boost


No economic data today but it is quadruple witching expiration, the quarterly S&P rebalancing, and we are approaching the end of the quarter.

The good news: for all the worries, the S&P 500 is up 1.02% for the quarter (as of yesterday). The bad news: without the big gains in energy, the index would be down 0.05%. Energy is the biggest sector gainer, up 9.8%. The S&P is a market cap weighted index; higher market cap stocks have a bigger weighting. The price gains this quarter have helped the weighting of energy: it's now 11.7% of the S&P 500, the highest weighting since mid-1991. Financials, with a 19.6% weighting, the largest of the 10 sectors, is down 4.5% for the quarter.

The S&P 500 rebalancing occurs once every quarter; it happens because the shares outstanding of the companies fluctuate, depending largely on buybacks and stock issuance. During the quarter, the S&P rebalances automatically when the shares outstanding of any stock changes by more than 5%; otherwise all the changes are done at the end of the quarter.

The stocks which will see the biggest dollar declines in weightings (due to buybacks) are ExxonMobil ($8 billion), Microsoft ($5.5 billion), AT&T ($2.8 billion), CVS ($2.4 billion), and Pfizer ($2.3 billion).

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Those that will see the biggest weightings increase by dollar are Schering Plough (adding $4.1 billion), Schlumberger (adding $1.4 billion), Citi (adding $1.4 billion), and Intel (adding $0.8 billion).

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Another way to look at this is which companies might be most affected by gains or losses. Jones Apparel, for example, will lose $332 million in weighting in the index, but that is about 1.6% of the market value of the company. Other companies that will lose significant weighting in the index include Discover (losing 1.01%) and Limited (losing 0.9%).

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These changes will occur at the close. About $1.34 TRILLION is directly indexed to the S&P 500; but there are hundreds of billions more that are indirectly indexed to it.

Biggest mover pre-open: Harman International , as it appears that the $8 billion buyout of the audio company by KKR and Goldman Sachsmay be in trouble, another possible victim of the credit crunch. The offer was $120 in cash; Harmon down 10% to below $99.

Questions?  Comments?