Macro Tourist: I’m Shorting Tesla On The Index Inclusion News

[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.


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10 thoughts on “Macro Tourist: I’m Shorting Tesla On The Index Inclusion News

  1. Hmm, interesting. Some Tesla investors think of Tesla not as an EV or clean energy production and storage company, but as the only thing standing between us and the end of the world ie. climate change. Yes we recognize that we’ve put Tesla on a pedestal. But Tesla represents what we wish all companies were focused on doing. So even if it sells off a bit I have a feeling it’s devotees will scoop it right back up onto that pedestal. After all, we all need our gods.

  2. Mr. Muir should watch the CNBC interview with that trader noting that betting against TSLA is like fighting the Fed. Appeals to reason and data (or delta selling) are logical enough but, sadly, do not seem to be relevant in the TSLA parallel universe. There, it’s a Star Trek thing — Q said “Change the gravitational constant!” and this time, it worked. The dang thing just won’t go back down.

    1. Here’s another thing that’s like “fighting the Fed,” believing that we can stop or reverse climate change. Remember, only CA is trying to force zero carbon footprints and even that isn’t enough. If everything that uses energy were to manage a zero carbon footprint going forward, starting tomorrow, we’d still have the mess that isn’t going away and that mess has essentially reached the point of no return. Zero growth doesn’t reverse anything, it just stops the buildup (and zero won’t be possible anyway). Tesla will not save anyone’s world. It’s essentially a personal publicity stunt. In Germany the planned new plant will be damaging the area water supply so much the firm can’t yet get a permit to continue building.

  3. Tsla profits are largely derived from selling regulatory credits to other car manufacturers who are not currently selling EV’s in certain states( eg- California).
    As these other car manufacturers start selling EV, they will no longer need to purchase the regulatory credits from TSLA. I expect that TSLA’s profitability will decline when this happens.

  4. Missed that upswing. Annoyed because, in retrospect, TSLA is a “must have” in every ESG portfolio. So the wave of money flowing into ESG funds over the last two years has been of tsunami proportions.

    It’s not just Robin Hood millennials buying it.

  5. It’s not about stopping climate change. Climate change is happening now. However, what we do from now on will determine just how bad it will get. Tesla will not stop climate change but a 100 or a 1000 Tesla like companies in various industries might start to make a difference. There is a reason clean energy is going exponential, and it is not a passing fad. It’s life or death for human civilization. Just go to MIT’s Climate Podcast portal and listen to few podcasts. Also, you all don’t know anything about Tesla. Try Wait But Why’s series on Elon, SpaceX and Tesla.

  6. H does not allow links. Otherwise I would send you to MIT’s podcasts about climate change. Or NPR’s TED radio hours podcasts about climate change. Educated yourselves about it. Climate change is here. We can not stop it. However, if we make radical changes within the next decade we might be able to keep the planet habitable. Doesn’t matter to you old farts who won’t live long enough but matters a great deal to the young folk just starting to live. Give a damn. Yes the changes necessary are near impossible but the alternative is accepting the death.

    About Tesla, we need 100’s of Teslas in all sectors to get us where we need to go. Tesla is just all we’ve got. Holding on to a twig when we need a fleet of ships. Tesla is hope. Read about Tesla/SpaceX/Musk at Wait But Why. Understand the background. You are throwing rocks at a company you don’t understand. Did you know Tesla opened all their patents so other companies could build EV’s? Their whole goal is to get us to EV’s faster.

    1. Just want to point out that Mercedes, BMW, Jaguar, Fisker and others have high-end electric cars on the market or coming to market right now. Plus there are many more economical electric models from other manufacturers – companies that have successful production and delivery streams. We don’t actually need Tesla to save the world.

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