CRamer on AOL:
What was that horror-show involving America Online
(AOL:NYSE) about on Wednesday? Don't you get the
feeling that we will look back at this era and think, jeez,
why didn't the computer just figure out the optimal price to
get the job done? And what was with that funny by-hand
way the New York Stock Exchange handled these
orders?
When America Online finished its merger with Netscape
(NSCP:Nasdaq), mutual funds that run by indexing had to
reweight their AOL positions. Basically they had to buy
more. As billions upon billions of dollars are run by
indexing, this rebalancing becomes a really big deal.
As we never know when these deals are going to close, at
midday I learned that AOL would have a huge imbalance at
the close -- to the buyside -- because of S&P funds
glomming on to more AOL. But what can you do with that?
Can you buy the stock and then hope to flip it at the end of
the day? Is it already in the stock? Is it too late?
This rebalancing was really screwy. AOL was trading
horribly all morning, touching 102, and then the deal
closed. Immediately it shot up like a rocket as traders
either put two-and-two together about the need to
rebalance, or buy a lot more AOL, or they were told by the
guys who do this kind of program buying that it would
occur.
For me? Heck, I was long AOL, so I didn't have to do any
buying. But because the rebalancing is such an artificial
act, I decided to sell some stock in the last half hour, using
a scale, letting some go every half point beginning at 109.
Why bother to offer these scales? Because everybody
remembers the crazy buy the last time AOL got buffeted by
these S&Pers, when it was added to the index. You could
have made a ton of money selling AOL at the bell and then
buying it back the next day substantially lower when the
indexers had done their deeds.
I put stock on the book to go as high as 112. It turns out
the best prices I got were at 3:30 p.m. when others started
buying the stock with the idea of flipping it after the bell.
That strategy failed. I sold none at the bell, as it was below
my last sale on the scale and I did not want to break my
scale. (I didn't want to sell it below where I had already sold
it.)
I figure on Thursday I can buy back the stock I sold and
make a few bucks off the insanity that is this S&P
rebalancing, as the unnatural buying power should
disappear as swiftly as it showed up Wednesday.
Crummy way to make money, but as long as these
institutions do this kind of by-rote buying, I figure why not
profit from it?
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