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Additions to the S&P 500
If you read that stock XYZ is heading into the S&P 500, put it near
the top of your watch list and be prepared a decent move. Here's why:
Every year more mutual funds "mirror" the S&P, the index of 500
stocks with most of the largest market capitalizations. Stocks
regularly move into and out of the index, and the funds respond. A
merger is often the reason.
Suppose a company is bought out and therefore has to "leave" the
S&P. That creates a "hole" that must be filled, and the index will
quickly announce a stock to replace the once that was lost to the
merger.
Now the trading fun begins. Every fund that tracks the S&P will fill
the hole in the index by purchasing some stock in the company that
is going into the index. Suddenly there is an awful lot of
buying pressure as the laws of supply and demand kick in. If 500
funds start buying the same stock, chances are better than 90% that
the issue is going to move very well.
Why not 100%? Shouldn't every stock run on its way into the S&P? No
such luck. If a company already has huge institutional ownership,
sometimes the news of the addition to the S&P has little or no
effect on the stock. With massive institutional interest there is
the probability that there is a massive float (shares available for
trading), and all the funds buying it up won't make a significant
impact. Instead of the stock being purchased on the open
market, "intra day crosses" occur. In these cases a holding company
will actually sell its shares to itself!
Suppose a large family of funds owns 500,000 shares of XYZ in
its "tech growth" fund. There's news that XYZ is going to the S&P
500. However, the fund family also has an S&P fund. So the fund
managers will actually sell some of their holdings of XYZ from the
tech growth fund to the S&P fund.
The same thing can occur when stocks are added to another big index
like the NASDAQ 100, and especially the DOW. Otherwise, you can
almost count on a 90% success rate on a trade with the
incoming stock. Do some homework tracking the strength of
institutional ownership of the shares, and you'll make your odds of
winning even greater.
For more daily trading tips:
http://clix.to/wallmann
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