Market Recon Friday

Good Morning,

                     I was not going to lead with China, but… oh my.  This morning, the Shanghai Composite was absolutely shredded to the tune of 7.4%.  That index is fast approaching a 20% decline in just a couple of weeks.  Today’s trade was no better for the Shenzhen market, which was down 7.9% today, and is now more than 20% off of it’s peak.  Has the bubble burst?  Smells like it.  The Chinese Central Bank injected cash into the system this week, but it was too little, too late.  Valuations obviously had gotten out of control, and Margin debt is now 8.5% of the composite value of mainland shares. (Yikes)  The recipe is certainly there for continued contraction, but I’m glad that I don’t have to make a call on this one, and I’m not gonna.

                     What do you, the trader type need to know about this fine Friday?  Other than the fact that today is the annual June Russell Rebalance extravaganza?  Just two other things matter at all, and they both pale in comparison to what will transpire at today’s closing bell.  At 10am ET, the University of Michigan will release their final June number for Consumer Sentiment.  Two weeks ago, this item surprised to the upside with a pretty strong 94.6 tag.  The expectation for today is that they can hold this number.  The other item of the day is a speech by KC Fed Pres. Esther George, who tends to be hawkish, from Kansas City at 12:45 ET.  She is not a voting member of the FOMC this year.
                    Now, what to make of the Russell Rebalance?  If you’re new to this sport, it comes down to this, very simply….Russell reconstitutes their indices (Russells 1000, 2000, and 3000) just once a year.  Adding up all of the funds tracking these indices, the total dollar value is well over $4 trillion bucks.  The Russell 3000 represents virtually the U.S. stock market in it’s entirety, so it’s not really a factor here.  The 1000, and 2000 represent larger cap stocks, and smaller cap stocks respectively.  As Russell adds stocks to, or deletes stocks from these indices, said funds tracking these indices are forced to reconstitute their funds accordingly at the same time.  This forces huge volume, and volatility going into, and on the close of business on the day that the changes go into effect.  That day happens to be today.  The Russell 2000 will see the most additions, and deletions.  Sectors most impacted today will be Health Care, and the Financials.  This is typically the highest volume day of the year for floor traders.
                    I know today is important to you.  I sincerely hope that each, and every one of you may earn your keep today.  When it’s done, you will be exhausted, but at least it will be Friday night.  Remember, you don’t walk alone.
SPX; 2120, 2113, 2107, 2099, 2090, 2084
RUT: 1295, 1288, 1283, 1278, 1272, 1266