Friday Already? Russell Rebalancing Should Make Things Interesting

$8.5 Trillion.  

That's the value of the Russell "small cap" Index (IWM), which is up $3.7Tn (77%) from $4.8Tn in 4 years.  While that's impressive, of course, it's lagging the Nasdaq, which is up 130% in the same time-frame, so the Russell (and the other indexes) have a long way to go if they are going to catch the Nadaq (QQQ) – or maybe the Nasdaq is ridiculously overvalued?

The Russell rebalancing or "Reconstitution", as they like to call it, takes place today and thank goodness they have made their own infographic to explain it because I couldn't figure out how to do it in less than 10 pages – so click here if you want the details.  There will not likely be a huge effect, they are simply rearranging the deck chairs – it's not like when the Dow or S&P add or drop companies but strange things do happen as companies shift from the Russell 3000 to the 2000 or the 1000 because it takes them out of one ETF and puts them in another in some cases.  

Last year you can see that red spike down in June though – that was the last rebalancing and the index dropped from 1,175 to 1,075 (-8.5%) in 2 days – but then recovered the next week.  We went long on the Russell Futures (/TF) yesterday in our Morning Report and caught a $500 per contract gain up to 1,410 but today we are watching and waiting to see what happens.  

Getting back to the Nasdaq, although it seems outrageously high, the tech companies have come on strong with earnings – or at least Apple (AAPL) has, since that one company added $11Bn in profits or 50% of the Nasdaq's gains but that's enough to keep the p/e ratio of the entire index at a not-too-crazy 25.97 vs 24.09 for the S&P while the Russell 2,000 has a p/e ratio of 82.36 – THAT is why it's lagging so far behind!  

Now, to be fair, the Russell 2,000 tends to include some start-ups that are still in the money-losing phase of their existence and they have to get much bigger before they graduate to the…
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