Trader Talk

Pisani: S&P's Quarterly Rebalancing Friday

Tomorrow (Friday), the S&P 500 will be conducting its quarterly rebalancing. The S&P is weighted by market capitalization, so changes in the share count of companies trigger changes in the relative weightings of the individual stocks in the S&P.

Increases: these are due to more shares outstanding — this is most commonly a secondary offering (many of the financials floated new shares this quarter) but could also be due to conversion from preferreds (preferreds are not included in the market capitalization).

Most of the decreases are due to buybacks. Some companies, like ExxonMobil, have been consistently buying back shares for years.

The practical effect of this is that indexers who are linked to the S&P 500 will need to buy or sell these stocks in equal proportions to how much is added or deleted.

It is the policy of Standard and Poor's to immediately reweight any S&P 500 stock whenever there is a share count change that is over 5 percent. Below that, all the changes are aggregated at the end of the quarter.

Below are the largest reweightings, those above $1 billion. As you can see, some will see their weighting increased, some decreased.

The "%" line indicates what percentage increase or decrease will be needed. Merck, for example, will need to increase its weighting by 1.99 percent of its shares.

The "$ Mil" line indicates the dollar value of that percent. For Merck, that 1.99 percent is $2.317 billion.

That doesn't mean indexers will need to buy $2.317 billion in Merck. Indexers are only about 11 percent of the total value of the S&P 500, so they would buy about a tenth of the figures you see.

To make this more complicated: there are probably at least the same amount of the S&P (11 percent) that is used by other funds that are "emulating" the S&P 500 without officially acknowledging that. So these "shadow" funds will also be buying.

What does all this mean? Historically, it means a volume spike toward the close tomorrow. In some cases, we could see price moves, but this game has become very sophisticated: there are plenty traders willing to sell to indexers into the close. In recent years, there is usually enough supply.

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