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Rebalancing of the Dow Jones and S&P 500 Indices: Not So Balanced In Reality

Rebalancing of the Dow Jones and S&P 500 Indices: Not So Balanced In Reality

By Bryan Wiener

There is change in the air in lower Manhattan. At the close of trading on Friday, September 20, 2013, both the Dow Jones Industrial Average and the S&P 500 Index underwent a facelift of sorts.

In an effort to “diversify” and upgrade its price components, the DJIA removed Bank of America (NYSE: BAC), Hewlett-Packard (NYSE: HPQ) and Alcoa (NYSE: AA), replacing these stagnant symbols with Goldman Sachs (NYSE: GS), Visa (NYSE: V) and Nike (NYSE: NKE). Meanwhile, the S&P 500 adjusted its weighting on Apple (NASDAQ: AAPL) at 3:50, 10 minutes before the market closed on Friday. These transactions were clear as day and traders had every opportunity to take advantage of the telegraphed stock moves.

Although the decision to remove and add names to the DJIA was announced via an S&P press release on September 10, 2013, which generated a gap up move in Goldman Sachs, Nike and Visa, there still remains quite a bit of volatility when the physical portfolios are actually adjusted, not to mention the DJI ETF that tracks the Dow Jones Industrial Average. Depending upon the name, the move at the end of the trading day could vary from unnoticeable to aggressive.

Looking at Goldman Sachs, one can see how the market makers and professional stock traders took advantage of the impending buying after the close. The stock consolidated at around 166 and raged to 167.51 in the last six minutes of the day. In the last three minutes of the trading day, Visa soared from 195.86 to 197.85, basically a one percent move.

Nike did not trade as dramatically, but as a $69 stock, its liquidity is naturally greater. Such is the case with Bank of America, which moved less than 0.5 percent the last half hour of the day. As for Hewlett-Packard and Alcoa, those names are pretty dead anyway, so Friday's divorce was a bit anticlimactic.

Looking at Apple, despite opening up 1.3 percent on news of positive iPhone 5S/5C sales, the name was dead in the water from the end-of-day S&P 500 rebalancing. Traders had every opportunity to sell pops in the stock, either on the open or whenever Apple hit a technical barrier. Selling any call option was a fantastic play.

Buying cheap puts was another means to riches on Friday, as the stock began its descent around 3:50 pm EST as publicized. If timed perfectly, one could have bought the expiring 470 put for less than $0.20 and sold it out at about $4- just about a 2000 percent return.

Those are the plays that trader's live for.

The moral of the story: Be on the lookout for the next major index rebalancing. It could get you a 2000 percent return in the blink of an eye.

And it'll take less time than waiting for the new iPhone.


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