The Russell indexes rebalancing and approaching quarter end could influence the direction of stocks Friday.
The final shape of the financial regulatory reform bill may also be a factor. Congressional conferees were working Thursday evening to finalize the contents of a combined House and Senate bill, and the details could be known by Friday. Financial stocks were among the worst performers Thursday, down 2 percent.
"If you look at the dynamics, there's about $14 billion of Russell stock available for purchase at the close tomorrow. It's not surprising to see the market weak ahead of it," said Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. The annual reconstitution of the Russell indexes requires asset managers to adjust their portfolios to align with the changes. The final list will be made known Friday after the close but the market is already anticipating changes.
The Dow Thursday fell 1.4 percent to 10,152, while the S&P 500 was down 1.7 percent to 1073. Materials, energy, consumer discretionary were all down more than 2 percent.
Traders said the market moved on a multitude of worries, including on the potential for Europe's problems to spillover into U.S. corporate earnings and signs of weakening in the U.S. economy, even though Thursday's durable goods data was slightly better than expected.
"The whole market is down, but financials are particularly down and I think the market is pricing in a very negative outcome of the legislative process," said one trader.
Knapp said the durables data shows the manufacturing recovery is still in tact. "Has it gone past its point for maximum upside velocity? Probably yes, but it's still strong," he said. Durable goods were down 1.2 percent, compared to an expected 1.4 percent decline. Volatile aircraft orders were a factor, and excluding transportation, the orders were up 0.9 percent.
"I think the market is cheap enough and I think the data is likely to get better," he said.
Knapp said the earnings season may play out differently this quarter, compared to the past three where stocks rose ahead of earnings reports and then sold off. "This go around, net revisions have turned back up a little bit and we've sold off into earnings season. I actually think the risk reward is ok," he said.
Quarter end portfolio adjustments will likely be a factor, as investors are nervous about the economy ahead of next Friday's June jobs report.
Brian Edmonds, who heads Treasury trading at Cantor Fitzgerald, expects to see activity in the bond market around the quarter end. "I think there will be quarter end buying and I think our market is going to trade very well," he said.
"I think there's people trading Treasurys who need to buy," he said.
The auction of $30 billion in 7-year notes Thursday went smoothly, unlike the 5-year notes auction the day before. Edmonds said the market reaction was the opposite of Wednesday when the bond market performed well even after a poor auction. The 10-year Treasury saw its yield rise to 3.126 percent, after dipping to a low of 3.06 percent early in the day Thursday.
What Else To Watch
Friday's data includes a final look at first quarter GDP at 8:30 a.m., and consumer sentiment, released at 9:55 a.m.
G-20 leaders meets in Toronto and topics for discussion no doubt the European debt crisis and banking reform.
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