The S&P ASX200 index (Australia 200) will be "rebalanced" at the close of trading tomorrow. Seven stocks will be removed, and seven added. These fourteen stocks are very likely to see short term share price distortions through trading tomorrow, as fund managers whose performance is measured against the index buy those stocks that will be added and sell those that are removed. This introduces a potential opportunity for both investors and traders.

First, here's the list:

20140320 asx 200

Source: S&P Dow Jones Indices

The (badly drawn) yellow line divides the additions from the removals. Because so many managed funds are either tied to the 200 index (not surprisingly, they're usually called index funds), or are measured against the 200 index, the short term impact of the rebalance can be significant.

Fund managers use different strategies to deal with index changes. They may buy (or sell) before the rebalance date, at the relevant close, or after. Market positioning into the rebalance date is crucial. While post rebalance market action is variable, a more reliable indicator of  post rebalance moves is where a stock moves the "wrong" way before the index change date - that is, inclusions that fall and deletions that rise.

Village Roadshow was added at the December rebalance:

20140321 rfgThis is an addition that trended down into the inclusion date, leading to a sustained bounce.

While traders and investors will make up their own minds, here's one that caught my eye:

20140321 aig

Ainsworth Game Technology is an addition - that has traded down into today's inclusion. My expectation is that we will see buying throughout the day, spilling over into next week, as it is added to fund portfolios.

For investors, there may be opportunities to sell into rebalance strength or buy weakness. Traders may see short term effects as potential profit opportunities. Whichever camp you sit in, it's worth examining this list with today's closing index rebalance in mind.

Please note: CFD traders looking to participate in the "match" of closing trades around 410 pm may only do so by placing their orders with the CMC sales trading desk. Due to an anticipated high volume at today's close, it is recommended that those with trading intentions contact the desk to register their interest well before 4 pm by calling 1300 726 093