Tesla stock pops on S&P 500 index inclusion- sell the news?

A group of Tesla investors have been buying TSLA stock for months in anticipation of S&P 500 inclusion. Now it’s happened, will they unload the stock?

 

Must know before investing in Tesla

  • Afterhours on Monday, Tesla stock shot up by as much as 13% to $463 and a new record high. CEO Elon Musk’s personal fortune rose by $15 billion as a result.
  • Tesla will be officially admitted into the S&P 500 index - considered the benchmark for the US stock market - next month in the quarterly reshuffle
  • The EV-maker was snubbed in September despite meeting the criteria of 4x consecutive quarterly profits, likely because of huge volatility in the share price
  • The inclusion means S&P 500 tracker funds and ETFs will be obliged to buy stock but savvy traders offloading their stock could overwhelm the new ETF buying

 

In the club

Finally, Tesla has been included in the S&P 500 following Q3 results that showed its 5th consecutive quarter of profitability. The addition will take place on December 21 - it’s not yet clear which company will be replaced.

Tesla will be one of the most valuable companies on the index when it joins because of the huge gains in its share price - especially over the last year. The weighting in the index will be so large that S&P is considering adding it in two tranches on September 14 and 21 to spread out the impact.

 

Chart

Tesla stock has jumped double digits afterhours on Monday in response to news it will be included in the S&P 500 index.

 

tesla-stock-price-after-S&P500-inclusion

 

The trade

“Tesla will be one of the largest weight additions to the S&P 500 in the last decade, and consequently will generate one of the largest funding trades in S&P 500 history,” according to index-provider S&P Dow Jones Indices.

 

tesla stock Elon Musk

 

There is a cohort of Tesla bulls who have been hoping to drive up the share price and sell the shares to index funds. According to this theory, the funds will have to buy TSLA stock in the above-mentioned funding trade once Tesla was in the index- leaving them 'holding the bag' with overpriced shares.

The 'index inclusion' traders suffered a setback in August when the S&P 500 index committee left out Tesla in favour of Etsy and two others. Since then there has been an overall pullback in technology stocks including Tesla. The pullback has been brought on in part by a summer of of heavy individual stock options trading. Two of the stories driving the options trading was Tesla's 5:1 stock split and the chance Tesla would be included in the S&P 500.

Presumably, the Tesla investors with this strategy either closed out in August or held out for the next reshuffle.

 

What now?

The Tesla stock is set for a 10+% open on Tuesday. If the gains start to fade, then one possible explanation is that those who bought TSLA in anticipation of the index inclusion sell in greater number than latecomers who are buying the news and the index funds who need to buy the stock before December 21.

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