Shares of fertilizer producer Intrepid Potash (NYSE:IPI) stock are hopping 13.4% higher as of 11:30 a.m. EDT Tuesday, while shares of (in most ways entirely unrelated) liquor vendor Castle Brands (NYSEMKT:ROX) and (still unrelated) oil and gas production company EXCO Resources (NYSE:XCO) fell 8% and 7.6%, respectively.
All three of these companies experienced rises or falls in excess of 10% this morning, but so far as I can tell, the only other thing these companies have in common is that, this morning, the Russell indexes family either added them to or subtracted them from its Russell 3000 and Russell 2000 stock indexes.
Assuming this is the news that is driving the stocks, two of the three stock movements make some sense. You see, when a big index adds a stock to its list, mutual funds and ETFs that track that index's holdings have to buy the stock in question -- creating demand for the stock. (And as we know from Economics 101, higher demand for a good of set quantity drives up the price of that good.) Conversely, when a stock gets removed from an index, funds and ETFs that track the index should sell the stock out of their holdings, driving the stock's price down.
Thus, when we learned that Russell was adding Intrepid Potash to its index today, it was only natural to expect to see Intrepid Potash stock jump higher. Conversely, when we learned that EXCO Resources was being removed from the index, we shouldn't have been surprised to see that stock fall. Really, the only curious development today was Castle Brands getting added to Russell's index -- and then its stock declining in price.
Of course, none of these stock market wibbles and wobbles has much significance to long-term investors. A business -- which is, after all, what we are investing in -- isn't affected much by which mutual funds and ETFs owns it.
Aside from offering a chance to take some quick profit after an index-rebalancing windfall, or making us gnash our teeth and curse the unfairness of the world when our stocks "go down" through no fault of their own, developments such as today's should be ignored by investors. There's really nothing to see here, folks. Please move along.