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Cramer: Buying Opportunities in Russell Rebalancing

Jim Cramer explains where the opportunities will be with Friday’s $9 trillion Russell index rebalancing and its ‘moving day’ implications for meme stocks.

With inflation jitters fading and market volatility receding recently, all eyes turn to the Russell 2000 Index rebalancing Friday. Where some see risk, Jim Cramer sees opportunity.

Cramer made that point about the $9 trillion index and its “moving day” implications – and more on a recent Mad Money show.

“The artificial forces that drove the market lower seem to have disappeared,” he said. Traders have all but forgotten about inflation and the Fed, meaning there’s more fuel for stock to rally.

What's changed? The attitude of the buyers, Cramer said. Traders loathed the Fed's comments on inflation, but now they've come to terms with the fact that even with a little inflation, things are still looking pretty good for our economy.

That means there are still a lot of bargains to be had, especially on Friday, when the Russell 2000 index will rebalance, creating lots of opportunities. It will be a chance to buy some great companies, like UPS  (UPS) - Get United Parcel Service, Inc. Class B Report, which reported strong earnings.

Get more of Jim Cramer's investing insights and stock strategies over on Real Money.

Cramer also said the rebalancing may affect meme stocks. He has a bit of important advice for anyone who is short those equities:

Investors are "beginning to see signs of what could be an important rebalancing on Friday. We’ve got to focus on that.”

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He said he thinks “there are a lot of meme stocks that have been inflated since the last time we had a Russell rebalancing. And that means you want to go very lightly if you're short a stock like Clover Health Investments  (CLOV) - Get CLOVER HEALTH INVESTMENTS CORP Report, 34% shorted.”

"The meme stocks tend not to care about the actual fundamentals as much as they care about busting the shorts," Cramer said.

In a special report from CME Group, Payal Shaw writes: The Russell 2000 reconstitutes its equity market indices every June, due primarily to the ever-shifting market tides that could throw the index out of whack if left unattended. Consequently, the Russell must recast to properly reflect those changes and to comply with its own public and transparent rules methodology.

Why is the rebalancing so important to investors?

The recast could lead to new opportunities reflecting shifts in market prices and volatility. The annual reconstitution is one of the most significant drivers of short-term shifts in supply and demand for U.S. equities, often leading to sizable price movements and volatility in individual company names or industry sectors. The final day of the reconstitution has typically been one of the highest trading volume days of the year in U.S. equity markets.

Friday, investors can capitalize on companies moving in and out of the Russell 2000 after rebalancing by buying the former and selling the latter.

The annual reconstitution requires thoughtful and well-executed risk management on the part of investors. It is one of the most significant drivers of short-term shifts in supply and demand for U.S. equities, often leading to sizable price movements and volatility in individual companies or industry sectors.

Investors thinking about rebalancing their index exposures could involve buying all index additions and selling all index deletions, while carefully weighing the trade-offs between tracking error and minimization of price impacts and trading costs. Although reconstitution poses a risk of performance slippage and index tracking error, it also can present opportunities for investors seeking to benefit from share price moves that arise from reconstitution.