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. Heres 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%? Shouldnt 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 wont 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. Theres 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 youll make your odds of winning even greater. |
