The news: Today will be one of the heaviest volume days of the year, due to the annual reconstitution of the Russell indexes. All of that action – as $8.5 trillion in assets based on Russell’s benchmarks has to be adjusted to the indexes’ new formulations – makes headlines, but the real news came two weeks ago, when FTSE Russell first announced its anticipated changes for 2017.
The backdrop: All of that action had me looking for an edge, which is why I used to enter the individual stocks into my charting program, throw out the charts I hated and make a watch list of stocks to play. Frankly, it was way too much work and didn’t pan out by producing real leads.
So I instead started examining the index changes looking at the sectors that stand to gain the most, thereby getting an idea of which ETFs will benefit the most from the changes. It’s the only way I have found to possibly benefit from the Russell reconstitution.
My investment thoughts about the news: As I reviewed the preliminary Russell changes this year, health care, financials and biotechs stood out. I didn’t like the looks of the Financial Select Sector SPDR (XLF), so I steered clear.
The SPDR S&P Biotech (XBI) and the Health Care Select Sector SPDR (XLV) looked promising. Here’s where all of the volume we will see on Friday comes into play; I’m expecting a nice big-candle day, a nice move day, especially in those sectors.
How I’m playing it: Health care was looking perky, so I was long 150 shares of XLV (purchased June 1) before Russell’s preliminaries were released. After Russell ‘s news, I bought 500 XBI on June 13 and added 200 XLV the following day.
If the XBI hits the 80.42 mark, I’ll sell half of my stake. XLV is breaking to new all-time highs, so I plan to run with it. I’m confident there’s more upside, but at some point I will put in a 4 percent trailing stop on both. Right now, I’m riding them up and I keep raising my stop at the support zone.
Petra Hess runs PetraPicks.com. She is a technical swing trader and long-term investor in domestic and Canadian stocks. She only trades stocks, not options. At the time this article was published on RagingBull.com, she had no shares or open orders in XLF and held positions in XLV (350 shares) and XBI (500 shares).