What the Heck Happened Friday?

If you were looking at how the market closed Friday, you may have noticed a huge upsurge of volume right at the closing bell. But if your thoughts immediately imagined a repeat of the Flash Crash of last month, don't worry: Friday's huge volume moves were highly anticipated and a regular happening.

It's that time again
Russell Investments, which is best known for its small-cap Russell 2000 index, makes changes to many of its benchmark indexes this time each year. Every year, some new stocks make the cut to move onto Russell's indexes, while others that no longer qualify get moved off the lists.

That may not seem like such a big deal. But with more than $3.9 trillion invested according to various Russell indexes, index-tracking investors have to buy a whole lot of stock when Russell makes changes. That can make for some volatile trading when the changes take effect, as happened last Friday.

Berkshire's sequel
This year's most extraordinary change came from Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , which was added to the large-cap Russell 1000 index on Friday. Berkshire is huge, among the top 20 stocks in the index, and representing more than 1% of its entire value, so index funds trying to buy up shares were in the unenviable position of trying to coax Warren Buffett's infamously long-term-oriented investors into giving up their shares.

That didn't go well for the buyers. Berkshire rose more than $3 for the day, $2 of which came in the final 10 minutes of trading, as more than 60 million shares traded. The rise brought Berkshire's gains to 10% over the past two weeks.

Amusingly enough, exactly the same thing happened when Berkshire was added to the S&P 500 back in February. Shares rose after the announcement, and the stock traded a whopping 316 million shares on Feb. 12, when it was officially added.

Getting Sirius about indexing
Another beneficiary Friday was Sirius XM Radio (Nasdaq: SIRI  ) . The stock had been dropped in 2009 because of its low share price. But thanks to the company's huge recovery, the stock qualified to get added back to the small-cap Russell 2000 this year.

Sirius didn't have an unusually large gain for the day, rising just 2%. But the stock jumped 5% in a matter of minutes, with 150 million shares trading in the last minutes of the day.

Coming home
Another group of stocks also saw unusual activity because of a change in Russell's rules. Over the past several years, many U.S. companies have moved their headquarters abroad, including Tyco International (NYSE: TYC  ) and Ingersoll-Rand (NYSE: IR  ) . Those companies had been expelled from Russell's U.S. indexes upon doing so.

This year, however, Russell changed its rules to focus not on the location of a company's headquarters, but rather on where the bulk of its assets are, as well as the primary exchange on which its shares trade. That brought Tyco and Ingersoll-Rand back into the Russell 3000, in addition to Thomson Reuters (NYSE: TRI  ) and Covidien (NYSE: COV  ) . Most of those companies saw modest price rises toward the end of the day, but each of them definitely saw big volume.

Where to from here?
Unfortunately for investors, index-related moves are sometimes short-lived. Berkshire's experience with the S&P 500, for instance, has been mixed. It held onto its gains through March and April, but then gave them all back and then some during the correction, before the Russell rebalancing helped push them back up again.

Over the long haul, index moves are just a blip in the ups and downs of a stock's price. They do, however, force index funds to become short-term traders with a mandate to buy at any price. With that buying pressure now gone, don't be surprised to see all of these stocks return to normal in the coming days, as they become accustomed to the realities of trading for members of major stock market indexes.

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Fool contributor Dan Caplinger's stereo has a volume knob that goes to 11. He and the Motley Fool own shares of Berkshire Hathaway, which is a Motley Fool Stock Advisor selection. Berkshire Hathaway and Covidien are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always cranks it up.


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