Google Moves on Friday -- Much Ado About Nothing, Says Investment U

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At the close of trading this Friday, Google (Nasdaq: GOOG) officially joins the S&P 500. Wall Street pundits and speculators have been abuzz with predictions about the effect this will have on the index -- as well as Google stock. “Rebalancing” has been the operative word.

At the close of trading this Friday, Google (Nasdaq: GOOG) officially joins the S&P 500. Wall Street pundits and speculators have been abuzz with predictions about the effect this will have on the index -- as well as Google stock. “Rebalancing” has been the operative word.

“No doubt, index fund managers have some movin’ and shakin’ to do,” says Investment U’s D.R. Barton Jr. (http://www.investmentu.com) "Although rebalancing is a lot of work for fund managers, the event is shaping up to be ‘much ado about nothing’ for the rest of us,” he says.

Index-related funds have to change their portfolios to reflect the change from ousted Burlington Resources to newly anointed Google. Credit Suisse First Boston estimates that in total, index funds will have to drop Burlington Resources, selling off about $1.6 billion in total. They then have to buy $6.8 billion of Google stock. In order to make up the difference, funds will have to rebalance their portfolios by selling off $5.6 billion worth of other stocks.

“Selling $5.6 billion of S&P stock would theoretically mean a reduction of 0.51% or about 6.7 S&P points,” says Barton. “The current daily range of the S&P 500 is 10.7 points, so it doesn’t mean much.”

The bottom line is this: For investors who do not have Google in their portfolios, the effect of its addition to the S&P 500 index should be minimal.

  •      If you do hold Google stock: A sensible play might be to hold on through late Friday as stock is bought to add the search giant to fund portfolios. After that, probabilities are that Google could drift (or fall harder) back to its pre-addition pricing. However, one thing we know about Google is that it can be a volatile stock, so it’s not likely to follow a straight path in one direction or the other.
  •      If you do not own Google, but do own index funds: No need to panic. Traders and investors have already priced this event into the index, and the math adds up to minimal effect on the index.
  •      If you are a gunslinger who can control risk: Several interesting areas of resistance are coming into play that could limit the upside on Google (between $397.50 and $406.50). Google is also overbought technically because of its current run-up. Add this to the end of the buying by index funds (which, again, will last through Friday), and you have a classic setup for a short sell. (However, this setup is only for experienced traders and investors. Many short sellers have had Google eat their lunch -- and dinner and dessert -- over the past year.)

Remember that the markets are driven by trader and investor psychology, sentiment and actions. Don’t get caught up in the media hype of this (or any other event), but be aware that others might.

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Juan Munoz
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