Tesla at the Turn

2020 has been quite the ride, and it’s not over yet.

One of the craziest rides of the year has been the phenomenal growth of Tesla’s share price, and at the close of trading this Friday it will officially join the S&P500 index as the 7th largest holding.

Since the start of 2020, Tesla’s share price has grown by an astounding 657%, compared to a 16.39% total return for the S&P500 index:

The stars have aligned for Tesla bulls, but it is important to consider that its addition to the S&P500 is a zero sum game. It is forecast, that Tesla will be added as a 1.5% weighting. This implies that approximately 1.5% of all S&P500 holdings will be put up for sale to make room for Tesla’s inclusion, meaning that there will be a record amount of stock for sale.

Kevin Muir of the excellent MacroTourist letter forecasts the following amounts of stock for sale:

Source: https://themacrotourist.substack.com/p/tesla-rebalance-focus-on-the-index

These are staggering numbers.

20 billion worth of Apple shares for sale. Over one day’s average trading volume of Berkshire Hathaway to go. In excess of $81 billion worth of selling overall.

Tesla’s shares have risen 55% since the November 16th announcement that they will be included in the index. Surely there have been some buyers that are anticipating a supply squeeze to indexers. What happens if this doesn’t materialize, and supply is more than adequate?

What’s more, the options traders are, of course, all over Tesla’s inclusion into the S&P500 as well. In fact, approximately 17% of option open interest is riding on Tesla:

 

Source: @OptionAlert (Twitter)

Surely, this is the lay-up of the century and all will go well.

It is also worth noting that open interest in the options market is 118% higher than it was at this time last year.  

Recently the market has been in a state of upwardly meandering content. Are these forthcoming index adjustment sales priced in? We shall see. On the other hand, Tesla’s ascension to the S&P500 pantheon just might be the most telling ‘sell on news’ event of all time.

Be aware, switch off your autopilot and buckle-up for the ride.