If Tesla is included in the S&P 500 soon, then there will need to be approximately 25 million shares purchased. The shares will cost around $40 billion at an average share price of $1,600.
First, index funds will need to collectively sell around $40 billion worth of shares of all the largest companies in the stock market. Second, they will need to purchase around $40 billion worth of Tesla shares.
Considering only the purchase of Tesla shares, one would reasonably expect the share price for Tesla stock to skyrocket. But this is not necessarily what will happen.
Last Thursday and Friday, there was a major sell-off of shares. At close on Wednesday, the S&P was at 3,276. At close on Friday, it was down to 3,216 after dropping on both Thursday and Friday. At the same time, Tesla stock also dropped from $1,592 at the close on Wednesday to $1,417 at the close on Friday. In other words, Tesla moves with the market.
There were 24 million shares of Tesla traded on Thursday and another 19 million shares traded on Friday. In total, 43 million shares were traded, while the share price dropped by $175.
In other words, just because there are 25 million shares of Tesla that need to be purchased does not mean that the share price will increase. On those two days, investors purchased approximately 43 million * $1,500 = ~$65 billion worth of Tesla equity.
Compared to the idea that 25 million shares need to be purchased on top of whatever is going on normally with Tesla shares trading, if the action is preceded by a macro market sell-off, it can change the trading dynamics significantly. Rather than the share price running up to $2,000 as some belief will happen, if Tesla shareholders are skittish and the trading day begins with a macro sell-off, it’s possible uninformed Tesla shareholders sell at a loss, thinking they are avoiding a macro market collapse induced loss.
Because the S&P 500 did not announce the Tesla inclusion, the trading last week cannot have been a result of the company’s inclusion and must have simply been a macro trading event due to macroeconomics, and not a change in Tesla’s status. But those two days are indicative of what could happen when and of course if Tesla’s inclusion is announced.
If a macro sell-off is initiated and some Tesla shareholders don’t know it is because of Tesla’s inclusion into the S&P 500 index, they might be scared into quickly selling off their shares at a loss.
FUD preceding the move would make sense. Last week, for example, some analysts asserted that Tesla’s shares are priced far above where they should be and that the share price is likely to collapse soon. This sort of FUD primes Tesla shareholders to get ready to sell in case of a macroeconomic collapse. Beginning trading with a sell-off that mimics a macro problem will likely trick some investors into selling.
It is therefore a good idea to keep an eye on whether Tesla has been admitted into the S&P 500 prior to selling any shares over the coming weeks/months.
S&P managers can hold special meetings and admit a company at any time. So, it is a good idea to understand the possibilities in advance of whatever actually happens. Trading last Thursday and Friday disclose one-way trading might proceed upon notice of inclusion.
Index fund managers would no doubt love to be able to buy up Tesla shares at the same time the price is falling.
Tesla reported profits for four quarters in a row and is now technically eligible to enter the S&P 500 index. The final hurdle is the approval by the board at S&P which decides on whether or not to admit each company. Its decision is guided by rules, but in the end, a qualitative decision and inclusion are not guaranteed.
Assuming inclusion, index funds will need to sell approximately $40 billion worth of stock in other companies, and then purchase that dollar amount worth of stock in Tesla.
The sell-off is likely to appear like a macroeconomic collapse, which would typically also drop the price of Tesla shares. Indeed, trading last Thursday and Friday did exactly that; there was a sell-off of much of the companies and there was trading of more than 25 million shares of Tesla stock. The difference is that prior to last Thursday, there was not an announcement that Tesla is going to be included in the S&P 500.
If a sell-off of $40 billion worth of other companies in the index results from the decision to include Tesla into the S&P index, then it is likely Tesla’s stock price will increase.
It is therefore a good idea for Tesla shareholders to check whether an announcement has been made that the company has been included in the S&P 500 before selling off shares in the event they observe trading that has the appearance of a macro drop of a few percentages of the index funds.
Tesla LONG (Buy)
ENTER AT: 115.350