Ketchup, Mac 'n Cheese & The Q1 Rebalance

Ketchup, Mac 'n Cheese & The Q1 Rebalance

The stock market and index futures have seen low volume recently and, with little news expected today, may stay sleepy. But a phenomenon may be happening which only a few thousand traders know about and which you won't hear much about on CNBC: the end-of-quarter rebalance.  

Ketchup, Mac 'n Cheese & The Q1 Rebalance
Ketchup, Mac 'n Cheese & The Q1 Rebalance

It's something individual investors do, or are encouraged to do, in their own portfolios, but funds do it well and on a massive scale. What's more, funds get to take advantage of a trick individuals cannot, which lets them sell their losing positions, but mark them up later to make their quarterly performance look better. They can mark up the winners right away, of course.

It's called T+3 and some call it an overblown myth or an accounting gimmick that is no longer done. But it helps explain the quiet, downward price movement we've seen in US stocks this week.


On both Monday and Tuesday, stocks wandered sideways all day, with all kinds of explanations given, only to sell off at the close. T+3 now refers to the five-day period in which the big mutual and investment firms can buy or sell stocks (or bonds) on one day, but have the settlement date for the transaction be 1-3 days later. In the old days, this was to allow time for the paper certificates to be transferred and the checks to clear.

But in the electronic age, T+3 is a way for big funds to exit their losing positions at the end of the month or quarter, but not have the transaction settled (and counted on their books) until the start of the next month or quarter. This way, those losers don't show up in their monthly and quarterly reports. Winning positions tend to get marked up right away, however. Neat trick, huh? It happens in your 401K and other portfolios at the end of every quarter.

While the media may look to today's crude oil report or Greece or the continued strong dollar as an explanation for the low volumes and sideways price movement, it may come down to institutional order flow, the big players executing orders they've planned for weeks or months. They will use algorithms to run the sell stops down, as they did yesterday. And soon they may well run the buy stops back up.

The only economic report due out is the weekly crude-stockpile data from the U.S. Energy Information Administration. Late Tuesday, the American Petroleum Institute said its data show a 4.8-million-barrel gain in crude-oil supplies. 

The other factor likely to influence stocks is the US dollar, which has shown some weakness lately, taking a breather from its dramatic rally. My colleage Stan Shamu of IG Australia writes, "the U.S. dollar is a sleeping giant at the moment, and we probably won’t be seeing much volatility in equities...until it awakes." The euro is up +0.49% to $1.0989, but Stan warns against going long until it clears 1.1000 in a definite way.

While the dollar and crude may cause US stocks to follow the downward path of the DAX and Stoxx 600 which are both lower this morning, once the selling portion of the end-of-quarter rebalance is done, stocks may rally. Despite the lower successive closes, US stocks are still just a strong rally away from their all-time highs. 


One bit of news causing excitement (but so far no broad rally) this morning is the purchase of Kraft foods by Heinz, creating one of the world's largest food companies with an estimated revenue of $28 billion. Shares of Kraft have soared as much as 37% this morning. One of Kraft's minor shareholders is Warren Buffett's Berkshire Hathaway, whose shares amount to about 0.01% of Berkshire's total holdings.

Buffett is estimated to have made about $4 million in this morning's rally in Kraft stock to new highs. $4 million is a little less than what he makes every three hours. As someone who has put ketchup on his mac and cheese since childhood, I couldn't be happier about the merger. 

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