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Saturday, June 27, 2009

A Sirius Sell Off: The Russell Effect

As you may have noticed Sirius took a nose dive in the last 10 minutes of trading Friday, closing down over 20%. The 10 day average volume for Sirius is 67.5 million shares, however on Friday the stock traded over 432 million shares (including after hours). With roughly 100 million shares traded at 3 PM, Sirius volume exploded in the final hour, especially in the final 10 minutes and into after hours. This is most likely due to Sirius being deleted from the Russell Index.

As a recent article by Mark Hulbert on MarketWatch states about the Russell Reconstitution:

So much money is invested in index mutual funds that adding or deleting a stock from a widely followed index has a huge impact on its price.

A stock that is added to an index, for example, will automatically be purchased by all funds benchmarked to that index, propelling its stock higher. Conversely, a stock that is deleted will automatically be sold, forcing its price downward.

Note carefully, however, that these big price swings have nothing to do with the stocks' fundamentals. So issues that have been added to an index will presumably become overvalued relative to stocks that have been deleted.

In after hours, Sirius traded as high as 48 cents but finished trade up 6 cents (16.67%) to 42 cents. The current bid ask spread is .415/.42. Sirius had a nice move up Thursday on the news of a strong debt sale, so it will be interesting to see if Sirius can hold this after hours gain into Monday. I am lucky I didn't have any stop loss orders in for Sirius as I would have sold at the wrong time.

To get an entire list of stocks added and deleted from the Russell Index on June 26, 2009 Check out my blog post Russell Reconstitution Stocks Added and Deleted from the Index.



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