TABLE OF CONTENTS
Video Overview: S&P Index Trading
When a company is added to an S&P index, other funds that mimic the holdings of stock within these indexes must rebalance their holdings and buy the stock which is added. The additional purchase of many shares often drives up the price of the stock being added.
For smaller cap stocks with lower trading volume, being added to an index can also stabilize its price by adding greater trading volume, which can keep the bid price and ask price closer to one another.
For all companies, the ongoing purchasing of the indexes can prop up the share prices over the longer term.
Being added to an index also helps make the stock more widely known to analysts, investors, and the media. More coverage can lead to greater trading volume, which can have a positive impact on the share price.
How to Trade This Scenario?
The average price move of stocks added to the S&P can be found in the Table View of the scenario. Prices generally move quickly in after hours trading, then pullback, before rising again over the course of several days. This allows for a variety of strategies, including intraday call/put options trades as well as more simple buy and sell equity trades.
Popular companies with high volume, like a Tesla, will rise higher and for longer than less well known companies. This can be seen by using the volume filter in the Table View to filter for high volume companies.
Note that the metrics in this area calculate price change from the close before and event to the close after an event. Often, stock prices peak mid-day before closing below the day high, meaning there's more money to be made than the data shows.
Important Dates to Understand
The date the stock will be added to the index differs from the date the announcement is made that the stock will be added to the index. In some cases, the inclusion could be 4 weeks away. So ETFs will buy the stock prior to the inclusion date. Traders will buy the stock after the announcement date, as shown below.
In the case above, Palantir was set to be added to the S&P 500 on Sept 23rd but the announcement went out September 6th.
Here's how it played out on inclusion day: the 23rd. Note the high volume spike at the close on the 20th, from buyers and sellers.
The total return over this two week period was 27 percent.
LevelFields alerts users when a new company is added or subtracted to various S&P indexes. The platform also shows how stocks are impacted by these changes short and long term.
For more information, visit the S&P 500 scenario on the LevelFields app, or visit the LevelFields corporate website for more information.
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