I estimate that most people reading this article are already well aware that on Monday morning, before the inauguration, Tesla Inc. (TSLA) will be added to the S&P 500 (and S&P 100). This makes the closing price bigger this Friday night. Oh, by the way, this Friday is also a quadruple witch ending event.
Based on the very concept of passive investing, investors who track the index – or, more specifically, funds that track the index – need to reinvest capital previously invested to buy Tesla shares. Will be forced. It is not as easy as you think, just in case you thought it looked simple. Yes, Apartment Investment and Management (AIV) will drop the index, but the two companies do not shape up to a similar business. To compare the terms of baseball, this disproportionate trade for Jim Freigosi is on the lines of Nolan Ryan. FYI, Occidental Petroleum (OXY) will abandon the S&P 100.
moving parts
it is a deal. Tesla runs close to $ 622.77 on Wednesday, with a market cap of $ 590 billion. This makes Tesla more valuable than Berkshire Hathaway (BRK.A) (BRK.B), valued at $ 524 billion. Usually when a company increases to membership in the S&P 500, it falls towards the back end of that group. It is most unusual that a company comes in as the sixth most valuable corporation in 500. This means that Tesla will require heavy allocation. AIV has a market cap of $ 766 million. Obviously, these funds need to sell at least a large number of their holdings in order to properly allocate their funds in a way that is index performance.
Tesla requires more than 1.5% weight at these prices, perhaps as much as 2% depending on what the stock does in the next 2 days. Now, all the action (Will) will not be completed at once, although there will be many more. Most funds have some avenues to try to correct the allocation in a few days. I am sure that the action is already underway and will continue till next week. The problem is not much consideration of the mass forced to buy a highly volatile stock at the top of its chart after only running 644% a year, but later this index itself will become heavier than ever.
The top five largest companies in the index already weigh 23% on the index. top 10? 28%. Now you bring in a new number 6 and kick out a name near the back of the pack. It appears to me that the S&P 500 may only become more volatile next week, and Tesla itself will reach a short to medium-term peak after the dust freezes.
These are not necessarily good things. Tesla will still have a cult following, but once the fund is bought topped by a mandate, they will be forced to sell significant amounts of shares at the events of periodic rebalancing. Think TSLA won’t do very little (or even more) business during the coming and going of these events? Unless Tesla’s volatility is included, Tesla’s impact on everything will expose passive investment to the performance of the broader market (and even of the economy), for those of us Who manage their own portfolios to survive.
Trading Tesla
Regular readers already know that I sold my entire long position at Tesla. I wrote in a stand-alone piece on 8 December that I dumped my entire stake in the opening session that day. My average price that day was $ 636. The idea was to buy at least some shares for a trade. I put my plan in pieces. I bought back a portion of the position above $ 579. I was going to add $ 565. The stock never got there, and I did not follow. So, I go at the end of the week to see what is likely to be a good trade, but nothing like I invested in stocks a week ago.
I should clarify this. I am 98% sure that I will sell my Tesla either on or near Friday. Could the shares be higher next week? He might. Has the risk increased for small investors interested in the name in the first quarter? Undoubtedly. that’s my opinion. I will make this name flat in less than 30 hours.
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