Index Changes Can Drive Stocks (and Investors) Wild
Technology highflier JDS Uniphase Corp. has been gyrating even more than usual of late, and its frantic dance tells something about a nasty little problem that is beginning to affect more and more investors:</br></br>After more than 100 years of dealing with stock indexes, Wall Street still often can't revise an index without developing severe indigestion.</br></br>Last week, it was announced that JDS Uniphase will enter the Standard & Poor's 500-stock index at today's close. The stock soared 26% on Nasdaq on Thursday and Friday. Then it fell 3.4% yesterday and Monday. If all goes as it usually does in such cases, the stock is likely to gyrate even more today, with a particularly big pop at day's end.</br></br>These moves are caused by mutualfund and other portfolio managers seeking to mimic indexes even as other investors are trying to make money by anticipating such moves, and they can be disruptive. In December, Yahoo! Inc. gained more than 63% in the week before it joined the S&P 500. In the following weeks, starting well before the rest of the market turned down, its stock price crumbled more than 50%; it still isn't back to where it was when it joined the index, while the Nasdaq Composite Index is back to its December level.</br></br>Even broader and, to some investors, more disturbing gyrations took place just last month. Hundreds of stocks were jolted on June 30 by seemingly innocuous changes in a variety of indexes, including the Russell 2000 and the S&P Barra growth and value indexes. With billions of dollars of shares changing hands on both the New York Stock Exchange and the Nasdaq Stock Market, stocks that often don't move much in a month dropped 10% in a matter of minutes. Some investors felt they had been hit with a sucker punch.