[Editor’s note: The following excerpts are from a much longer piece by Kevin Muir, formerly head of equity derivatives at RBC Dominion and better known for his exploits as “The Macro Tourist.” The full piece is available exclusively to his subscribers. Those interested can check out the new MacroTourist here.]
Well, it finally happened. I guess it’s fitting that in one of the most polarizing years in recent history, the most polarizing stock was finally added to the S&P 500.
Tesla bulls are coming out in full force. They are foaming at the mouth with “I told you so” optimism.
Well folks, I hate to break it to them, but the meat of the move is done. Yup. You read that correctly. Any opportunities from here on out are probably on the dark side.
Don’t believe me?
I dug up this article about index inclusion, and although it’s a little dated, it’s been my experience that the market has only gotten more efficient since it was written:
The largest portion of the extra alpha from a stock index inclusion is quickly built into the price. There is little edge buying after announcement.
My favorite chart? This one of the aggregate performance of the stocks being added to the index on the day of the announcement:
Often these index inclusions open at the highs and sell off all day.
I expect a similar situation to occur in Tesla.
I can already hear the pushback. “But Tesla is different because it is so big.”
Yeah, no doubt that’s correct.
At Monday’s prices, Tesla would be the 12th largest stock and would represent 1.17% of the index (according to TD Securities). Indexers need to buy approximately 133 million shares.
Yup. That’s a monster of a rebalance. One of the biggest ever.
And that’s partly why the S&P index committee announced this change so far in advance. They have given the market an “unprecedented long lead time for an index addition.”
So, even though this index rebalancing is like a python eating a massive boar, the zookeepers have given the snake lots of time to digest his meal.
For full transparency, Tesla was in my basket of high-tech large cap stocks that I was shorting. And although today stings, I am adding to the short into this move.
I don’t see this S&P 500 inclusion as the start of the next big run for Tesla.
If anything, this has the potential for an “all baked in” situation.
As we approach the Tesla rebalance day, the real opportunity might not lay in trying to compete in the Tesla food fight, but instead focus on the potential massive index delta selling.
I am shorting Tesla on today’s news, and as we get closer to the actual rebalance day, I will put on my trader’s hat, and lean on the stock market as well.
Trading opportunities are rarely out in the open – if it’s obvious, it’s obviously wrong. Never is this more applicable than in something like a much celebrated, long-awaited index inclusion.