Editor's note: Don't leave gains on the table... Microcap stocks have massive upside potential, but these risky assets can also ruin your portfolio. Joel Litman – chief investment strategist for our corporate affiliate Altimetry – says this uncertainty will scare many investors out of profiting in the microcap space today... That's why he believes investors must be aware of this upcoming market shift in order to understand how to profit from this unique setup. In today's Masters Series, originally from the June 13, 2023 issue of the free Altimetry Daily Authority e-letter, Joel previews "reconstitution day"... details how this event will generate buying opportunities... and reveals how you can capitalize on this looming shift...
The Busiest Trading Day of the Year Is Almost Here By Joel Litman, chief investment strategist, Altimetry Mark your calendar right now... June 28 will be the most important trading day of the entire year. No, I'm not predicting the recession will hit that day... or that some sort of "black swan" event will throw stocks into chaos, a la the COVID-19 panic of March 2020. Even so, for a lot of microcap companies, June 28 will be just short of life or death. It's guaranteed to be one of the busiest days in the market. And you need to be prepared. More than $10 trillion worth of investments will move during that one trading day. It may seem odd that I'm so confident in the face of such an uncertain market. There's a simple reason, though... June 28 is "reconstitution day." It's a yearly event in which all of the Russell indexes are rebalanced to reflect market changes from the past 365 days. And that makes it one of the most anticipated, most followed events on the financial calendar. Reconstitution day is only a little more than a month and a half away. So today, we'll take a look at what's at stake for the companies fighting to join and keep their spots in these indexes... and how you can emerge as a winner. The Russell rebalancing is a huge deal for small companies... The Russell indexes are a group of benchmark indexes used by investors around the world. They track the performance of the U.S. stock market. There are three major ones to track... - The Russell 1000 – The 1,000 largest publicly listed stocks in the U.S.
- The Russell 2000 – The 2,000 next-largest publicly listed stocks in the U.S.
- The Russell 3000 – The Russell 1000 and Russell 2000 combined.
These indexes cover the majority of U.S.-listed stocks by market capitalization that investors can buy. So a lot of folks track them. And pretty much all of these investors are watching – and waiting – to see what will happen on June 28... That's when the team at FTSE Russell, which creates the indexes, will review the 3,000 or so largest companies in the U.S. These folks will figure out which companies they're going to remove from the indexes because they've shrunk too much. They'll decide which companies will replace them. And the entire rebalancing happens in just one day. This is different from the S&P 500 Index, which rebalances quarterly... so only a few companies fall off or get added. It's also a smaller universe of big, stable companies. With only one rebalancing a year, a lot more companies flow in and out of the Russell indexes at a time. And we already hinted at another factor that makes a big difference...
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The very smallest companies added to the Russell 2000 are all microcaps. These tiny companies often experience much bigger price swings. Well over 200 companies can be added to or subtracted from the Russell 2000 each year. That's a lot of winners and losers. Keep in mind, institutional investors need to own these stocks to track the index's performance... So when a stock is added to the Russell 2000, it suddenly gets a ton of new buyers. On the other hand, when a company is removed from the Russell 2000, it has the opposite effect. Many investors and fund managers will need to sell shares of that company in order to match the index. The stock price plunges. Over the past seven years, in the six months leading up to the Russell 2000 reconstitution, the average Russell addition outperformed the Russell 2000 as a whole by 23%. The average subtraction underperformed the market by 10%. The Russell 2000 is the only index many microcaps qualify for. And that means reconstitution day can make or break these stocks. Traders, investors, and speculators have a field day trying to figure out which companies will be added. They understand that what happens with the Russell 2000 can lead to massive moves in these companies' stock prices... and so do we. This phenomenon plays out every year... For example, take tiny semiconductor company Aehr Test Systems (AEHR). As the name suggests, it makes the sensors that go into various testing devices. It shot up 52% in just the 60 days before last year's rebalancing, on June 23. Bel Fuse (BELFB), which designs and makes circuits, rose 68% in less than 60 days. And it doesn't end there... Biotech company Summit Therapeutics (SMMT) soared 75% ahead of last year's rebalancing. Energy company Eos Energy Enterprises (EOSE) climbed 66%. And Savara (SVRA), an under-the-radar biopharmaceutical stock, recorded a 57% gain. As you can see, the trend surrounding reconstitution day has shifted in recent years. A lot of the upside tends to happen in anticipation of the event. That means you have just a handful of weeks to pick up shares of the biggest winners... and get out of any potential pitfalls. This is one of the best opportunities to find under-the-radar ideas in the microcap space. It only comes around once a year. So you can't afford to let it pass you by. Regards, Joel Litman
Editor's note: Reconstitution day will open up a slew of high-upside opportunities, but that's not the only impact this event will have. You see, this rebalancing will result in a seismic shift for more than 3,000 stocks... The last time this event happened, dozens of stocks crashed 20% to 90%. That's why Joel recently went on camera to reveal how you can protect your wealth as this massive reset plays out. Learn more here... | 
