Weekly Review - 28 Jun 26

I hope all of you had an enjoyable weekend away from the screens. In this weekly review, i will be mainly going through Friday’s end of market price action. There’s many things to unravel there.
Subscribers to my telegram channel would note that i commented on the MOC orders at 3:58, 2minutes before the closing. - I comment on telegram much more in real time.
Why such a reaction?
Let’s go over what happened on $SPY
Into the closing auction, SPY suddenly nose dived all the way down to 717s (these prints are real). Orders were executed at those prices. Congrats to those who were filled below, those with stops that were triggered? Not so great.
$SPY as a tradable asset sets its clearing price via the closing auction. How this works is that, there a bunch of participants that know they want to trade “at the close” and get the price at the close - think people who are tracking some benchmarks etc.
Hence they submit these MOC (Market On Close) and LOC (Limit On Close) orders. These get collected before 3:58PM E.T. Just before 4PM, the exchange has a view of all those orders and then searches for maximizing the number of shares that can trade.
Its a straight forward process - however when there are large imbalances, the closing price can possibly diverge from “fair value”
What is the fair value of SPY? It is simply the sum of all the value of basket of stocks that it holds in the ETF - each undergoing their own closing auction mechanics.
This mirrors the closing for SPX Index - Because this is an index, it is not tradeable. It is calculated instead by taking the official closing price of each of the constituent stock multiplied by its weight.
Because, the closing price of each stock is done via their respective auctions, SPX prices are only published after the close.
Given that SPY is one of the largest products, such a “flash crash” is actually quite unusual.
The effects ripple out much larger in single stocks.
$BE was down ~16.5% on Friday. It was trading sluggishly, dribbling down before puking almost 10% in the last hour (the last 5minute candle was a 5% wide candle puke)
This effect can be due to the fact that BE was removed from the Russell 2000 to the large cap Russell 1000 index. The R2000 index has more AUM than the R1000 AUM. eg, IWM which tracks the R2000 has about 84B while the IWB which tracks the R1000 only has about 48B tracking it…
This mechanical rebalancing sell pressure gave it a good push into the close. At the closing price of $253 - I think this gives a good value zone.
$CRDO also toppled by ~11% on Friday. No results for guessing. Yes - CRDO was also rebalanced out from the Russell 2000 into the Russell 1000 index.
In my daily notes, you would realize i often reference my trading around flows. This is because while fundamentals drive the stock in the long run, the short term performance of a stock is mainly driven by flows.
Some of these flows are mechanical and not very intelligent.
They can offer some good opportunities. Of course, having a good knowledge of these will also allow you to understand why certain things are moving “weirdly”.
Extending beyond the week, we have the quarterly rebalancing coming up on Tuesday. JPM estimates that ~165billion of equities will be sold into the close on Tuesday.
The net effect of the rebalancing will be between how much gets sold into the close and the amount covered by hedge funds who anticipate and trade against such flows.
Given the fragility of markets at this point, i would say that - expect volatility to be high.
Good luck and enjoy the rest of your weekend!