Russell Index Rebalancing Unearths New “Buy”
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All of the Russell Indexes are rebalancing today.
That is, the Russell Global Index, the Russell 1000 Index, the Russell 2000 Index, the Russell 3000 Index, the Russell Midcap Index and the Russell Microcap Index.
The indexes rebalance once every year.
So why devote an entire column to something that seems like a technicality?
It’s simple, really.
Because a Drexel University study says that there’s a big edge to be gained here.
I must warn you, though, that the results of the study are completely counterintuitive.
As it turns out, buying the companies being added to the index is the worst move you can make.
However, buying the companies being deleted from the index is the functional equivalent of finding the Holy Grail.
I realize that this flies in the face of conventional wisdom. What could be better for a company than being added to a major index, right?
But apparently, it’s more beneficial to be deleted!
Let’s take the Russell Microcap Index, for example.
The Index, comprised of 1,633 stocks, is based solely on market capitalization.
Any company with a market capitalization between $30 million and $884 million will be part of the Russell Microcap Index, as of today’s Opening Bell.
With such rigid parameters for inclusion, though, many of the companies being added to the Index have just encountered dramatic declines in their stock prices.
Perhaps they were previously listed on the Russell 2000, but had such a terrible year that their market capitalizations got cut in half.
The reward for such a company is de-listing from the Russell 2000 Index and a new listing on the Russell Microcap Index.
Who would want to own such a company? Not me!
On the flipside, a handful of up-and-coming companies just got deleted from the Microcap Index because they’ve outgrown it, in terms of market capitalization.
Winning companies like Accelerate Diagnostics (AXDX) are among them.
Accelerate Diagnostics just saw its stock price jump from $8 to $30 over the last 12 months. Yet since its market capitalization has ballooned to $1.28 billion, it can’t be part of the Microcap Index any longer.
This under-the-radar company owns a technology, called “BACel,” that can detect certain blood pathogens in an hour.
The previous industry standard was 72 hours!
Even better, in just six hours, BACel can tell a physician which antibiotic would be best to use.
Bottom line, Drexel’s study found that stocks with good performance grow too big for certain indexes, while stocks with poor performance become too small for certain indexes.
The former continue to generate high returns while the latter continue to generate low returns.
In the first year after index rebalancing, the deleted stocks outperform the added stocks by 67 basis points per month.
So in accordance with the study, buy shares of Accelerate Diagnostics before the Opening Bell.
Onward and Upward,
Robert Williams, Founder
More Storylines Impacting Markets
Cost of New Homes is Now Six Times Median Income
The nationwide average price of a newly built home has reached $320,100, an increase of nearly 21% since 2012. At this price point, an average new home is completely out of reach for two-thirds of Americans, according to government data released last week.
The data corresponds to the growing wealth gap in the United States, which has seen inflation adjusted income decline by 9% for the lower 40% of households since 2007. This occurred at a time that incomes for the top 5% reached pre-recession levels.
According to Census Bureau data, an average new home now costs about six times the median U.S. household income, compared to the historic average of three times the median income. This has resulted in just 433,000 new homes being sold on an annualized basis in April, which compares to normalized annual sales of 660,000 units.
The housing recovery continues to benefit mostly higher-income families.
Spanish 10-Year Bond Yield Lowest Since the French Revolution
In an example of absurd risk pricing, the Spanish 10-year bond is now yielding its lowest coupon since at least 1789.
Interestingly, the interest rate offered for Spanish 10-year bonds is just seven basis points higher than equivalent yield in ultra-safe U.S. Treasuries, which has not happened since April 2010.
But the low-risk assumptions aren’t just limited to Spain. Several European bond markets hit fresh multi-century all-time lows while others are flirting with new record lows.
France saw its 10-year bond hit 1.654 intraday last week, which was the all-time low, dating back to 1746. Italian 10-year bonds fell to the lowest yield since 1945.
The most curious fact about the record-low bond yield is the reaction of European and American stock markets, which gained despite the bond market action.