Rebalancing

• Posted by Robert Sinn
• on September 29th, 2011

After an inexplicably large gap higher off the open, equities are markedly weakening as the session progresses. There has been notable weakness beneath the surface since the opening bell, primarily in momentum and large cap tech ($QQQ) names. Meanwhile, the “dogs” of the last quarter ($XLF) are outperforming the broader market ($IWM, $SPY).

 

 

The most likely explanation for this unusual price action is end of quarter rebalancing - by rebalancing their portfolios, portfolio managers aim to sell positions which they have become “overweight” in and buy positions which they have become “underweight” in. Here is a quote from Vanguard:

“Portfolio rebalancing is a powerful risk-control strategy. Over time, as a portfolio’s different investments produce different returns, the portfolio drifts from its target asset allocation, acquiring risk and return characteristics that may be inconsistent with an investor’s goals and preferences.”

The ebb and flow of the rebalancing trade will likely continue until Friday’s close, however, this tape feels heavier than normal to me and I would not be surprised to see a downward bias to the action.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus