These 8 Stocks Will Move Big on Friday

A lot of investors are going to be surprised by the huge spikes in volume that many stocks are going to see near the close this Friday. Some will wonder whether it's another sign of market manipulation. But don't worry: It's all perfectly normal, although it does give you an opportunity to get in on some interesting stocks before the investing masses do.

Playing index games one more time
Every June, Russell Investments, which is the company behind the well-known small-cap benchmark Russell 2000 index, changes its lists of component stocks for several of its indexes. Inevitably, the index reconstitution leads to some up-and-coming companies making it into the benchmarks, replacing those companies that no longer qualify for inclusion.

Given that this happens every year, you'd think that everyone would treat it as a non-event. But with nearly $4 trillion of institutional investments tied to Russell's indexes, there's a ton of money at stake -- and with the many index funds and other money managers that have to follow Russell's moves, you can expect to see substantial volatility as the changes become final on June 24.

Who's in
This year, arguably the most significant addition to the Russell 3000 index will be General Motors. After going bankrupt following the financial crisis, the company's IPO gave GM a $44 billion market cap. It's not unprecedented for large companies to get left out of the index for at least a while, but typically, the omission gets remedied at the earliest opportunity -- as is happening here.

But although GM may be the best-known name on the list, you'll find plenty of other promising stocks as well. Cloud-based phone company 8x8 (Nasdaq: EGHT  ) , oil and gas exploration company Hyperdynamics (AMEX: HDY  ) , and specialty retailer ZAGG (Nasdaq: ZAGG  ) , which is best known for making protective covers for iPhones and other personal electronic devices, are all on the preliminary list to get added to the index.

Getting added to the list doesn't ensure success, of course. Quepasa (AMEX: QPSA  ) is also on the tentative addition list, but its prospects are still in question. Despite its status as a public social networking company, it has fewer users and far less traffic than better-known sites and seems unlikely ever to close the gap significantly.

Who's out
Joining the Russell 3000 may not be as difficult as being the last Highlander, but its name tells you the most important rule: There can be only 3,000. That means for every addition, you need a stock to leave. Sometimes, mergers and acquisitions make room for new stocks, but you'll always find at least some stocks that get the boot.

This year's tentative hit list includes Delta Petroleum (Nasdaq: DPTR  ) , MELA Sciences (Nasdaq: MELA  ) , and Advanced Battery Technologies (Nasdaq: ABAT  ) . Although the reasons for each company's declines differ, they all share one thing in common: They've seen significant drops in their stock prices, and their market caps are now low enough to warrant getting downgraded to microcap status.

What's going to happen?
All the fuss these and many other stocks will see later this week stems from the institutions that track Russell's indexes. For instance, index funds that try to mimic the performance of the Russell 3000 will have to buy all the new additions to the index while selling their holdings in the stocks that are leaving.

Especially with smaller-cap stocks, which aren't always very liquid, the huge amount of institutional attention can move markets substantially in the short run. So if the stocks that are new additions to the index interest you, you may want to buy them today rather than waiting until next week. On the other hand, if you think they've come too far too fast, then waiting a while to take advantage of share-hungry index funds might get you a better price.

Be smart
The advantage of investing in individual stocks is that you get to call the shots on when and how you buy. Although index funds are useful, this is their weakness -- and with a little effort, you can exploit their mindless buying and selling later this week.

If you want to be smart about owning stocks, you'll want to check out these five. They're on the list of stocks that The Motley Fool owns, and we think you should, too. Click here to read this free special report today.

Fool contributor Dan Caplinger loves watching what stocks do on rebalancing day. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is a nutritious part of a well-balanced breakfast.


Read/Post Comments (12) | Recommend This Article (35)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 22, 2011, at 6:29 PM, rboudbee01 wrote:

    one reference is to Russell 2000, the small cap index, and another is to the russell 3000, which is not sm. cap...

    Are both supposed to be 2000?

    -R

  • Report this Comment On June 22, 2011, at 7:28 PM, TMFGalagan wrote:

    @rboudbee01 -

    The Russell 3000 is a broad-market index that includes both the small-cap Russell 2000 plus Russell's large-cap 1000 Index. GM is big enough that it will almost certainly go into the 1000; the others are small enough that they're probably going into the 2000.

    best,

    dan (TMF Galagan)

  • Report this Comment On June 23, 2011, at 10:51 AM, ROEoutshinesGOLD wrote:

    Thanks for the above explanation.

  • Report this Comment On June 23, 2011, at 7:19 PM, ThomasW1974 wrote:

    Any prediction on how high GM will go tomorrow or next week?

    31.00?

    32.00?

    32.00+?

    I took a huge short position on margins after reading this article and seeing that GM was trading at about 29.50 today- less than 1.00 off it's post ipo low. It's looking good so far!

    I figure even if it goes down to its post ipo low in the next week, it's eventually going to be back up to 30+. Therefore the risk is pretty minimal.

    Here's hoping this special opportunity pays off.

  • Report this Comment On June 23, 2011, at 7:43 PM, TSIF wrote:

    I don't know if you picked the title or not, but it is a typical headline designed to gain attention and detracts from a great learning opportunity.

    Yes, Volume will be high for company’s entering or leaving the Russell, but that doesn’t mean the share price will vary. Yes, it might vary some on a few, so I do agree and respect that you encourage those who already have an interest in a stock to consider the activity that might occur. The question is how much volume will the Russell Indexing add in proportion to normal/average volume.

    The indexes rebalance monthly. A new position will be quite a bit of activity, but again, in proportion to what?? You missed the chance to look at volume as a whole.

    DPTR, Delta is a $0.50 equity near an all time low. Index funds will shed about 2X daily volume. Yes this might blip Delta by a few penny’s when the sell order goes through, but it will quickly rebound.

    MELA has the lowest volume daily. The index fund shedding will be about 8X a daily volume, this could move MELA, but most MELA holders have ridden this down hard already. They are now gambling on a date with the FDA that may or may not ever happen. I expect this will be a net $0.20 drop.

    GM will barely notice the order. It will be a blimp for a few minutes and then blend in with normal daily activity.

    ZAGG is in the middle of a short squeeze at 5X average volume. This one will be interesting, but it will be hard to attribute the Russell to any movement when the short squeeze fades.

    The Russell additions and deletions are all about VOLUME. In some cases I expect investors have been trying to anticipate this move and the actual result on some will be that they will noticeably drop when the dust settles.

    The index funds may even wait until June 30th for some of their repositioning as they usually rebalance monthly.

  • Report this Comment On June 23, 2011, at 8:13 PM, TMFGalagan wrote:

    @TSIF -

    I respect your opinion, but past instances contradict your conclusion that it's inevitably a nonevent for prices. Last year, Berkshire Hathaway was finally added to the Russell indexes, and shares spiked almost 4% on volume of nearly 110 million B shares. The price did move back down over the following week, but those who weren't prepared for the move may have made some big mistakes in trading it.

    I appreciate your comments about the additional stocks. We'll just have to see what happens!

    best,

    dan (TMF Galagan)

  • Report this Comment On June 24, 2011, at 10:50 AM, ThomasW1974 wrote:

    Okay...nothing happening yet....waiting for the move up! GM is playing between 31.90 and 32.30 for the first 90 mins today.

  • Report this Comment On June 24, 2011, at 10:51 AM, ThomasW1974 wrote:

    I mean 29.90 and 30.20... opps.

  • Report this Comment On June 24, 2011, at 12:12 PM, TSIF wrote:

    Hi Dan, I have no issue with your analysis/potential overall. BRK-B is a good example of a 2-3 blimp that those who planned on trading might squeeze a bit more out of. The computer programs fuel some spikes. My issue is with your title and implication that all of the 200+ Russell 3,000 additions/deletions will have spike/dips. (or at least the 8 in your article).

    Some may actually trade the opposite direction due to other dynamics of fundamentals that time near the balance date. ZAGG in particular is under fire from several areas and could pull back sharply as the shorts cover.

    The Russell Additions deletions are important, if one spikes it's useful info to be aware of, but it's only one piece of what "might" happen.

    Also your title has no qualification or examples supporting it. Your BRK-B info with several other examples would have been useful.

    As you pointed out, we will soon see.

    Fool on.

    TSIF

  • Report this Comment On June 24, 2011, at 4:36 PM, TMFGalagan wrote:

    Initial reaction: definitely not as big a move as we saw last year. Some very short-term blips, and volume definitely spiked at the end of the trading day, but in the face of an overall down day for the markets, the responses were muted this time around.

    best,

    dan (TMF Galagan)

  • Report this Comment On June 24, 2011, at 5:53 PM, TSIF wrote:

    Definitely some huge volume got absorbed on some of these. Actually there was large volume in the last few minutes of many stocks not on the index list.

    I don't know if the brokerage firms did some fund to fund transfers or firm/firm block trades. REVU (deleted) had 6X normal daily volume They closed up $0.01. (which is about 5% for them). They have been trading at this level for several months so have a pretty firm base.

    DPTR (deleted) was about 12X normal volume and down about $0.02 which was about 4%. DPTR's $0.51 resistance level seems strong.

    ZAGG (added) dropped 4% 30 minutes before close in one big drop and then gained back 2% at the close, but still ending the day down 4.6%. As I expected ZAGG was under other pressures.

    I had 4 or 5 others set for a downthumb if they spiked more than 5%, but it didn't happen.

    Volitile day, with or without Russell playing.

    I would use limit orders and patience on everything the nex few days.

    The market movers seem to have created a well orchastrated dance. I"m sure they made money whether the rest of us did or didn't. There's always next week! Have a great weekend.

  • Report this Comment On June 24, 2011, at 7:49 PM, ThomasW1974 wrote:

    He swings and he misses.....

    I had hoped to see some serious movement in GM today. Didn't really happen at all.

    I made some profit off the 29.90-30.00 swing that kept happening all day, but not the big money I had hoped to see...

    Anyway- thanks for the article and the insight it provided.

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