Tesla (NASDAQ: TSLA) One of the biggest stock histories of 2020. With nearly 550% sports growth since January 1, those who believed in the business model built by CEO Elon Musk have made nice gains. Musk himself was one of the biggest winners of Tesla shares, ranking 3rd among the richest people in the world, according to Forbes.
In the long run, stock movements reflect the success or failure of a company’s underlying business. Short-term stock volatility is much more difficult to assess. Nevertheless, there is a good reason why Tesla shares look to be preparing for $ 600 per share in the near future. It can get much higher if the conditions are right.
Image source: Tesla.
It is a question of supply and demand
Tesla has a plethora of indicators that investors monitor from quarter to quarter. Shipping data is probably the most important, typically appearing in the first days of each new quarter. Revenue reports obviously also have a significant weight.
Behind all these catalysts, the number of key news items affecting Tesla in the current quarter is likely to be small towards the end of the year. This makes the share price more susceptible to factors that do not affect Tesla’s business strength.
Specifically, the biggest driver of Tesla shares by the end of the year is likely to be the decision of S&P Dow Jones Indices to take Tesla into the S&P 500 index. The case of the bull is quite simple:
- Current shareholders know that post-S&P 500 index funds will have to purchase significant amounts of Tesla shares on or before December 21st.
- Aware that all of this buy is on the horizon, there is little reason for shareholders to sell now.
The huge amount of money following the S&P 500 is incredible. The S&P Dow Jones Indices reports that an $ 11.2 trillion asset uses the S&P 500 as a benchmark to compare returns. More than 40% of that amount – $ 4.6 trillion – is an indexed asset tied directly to the components of the S&P 500.
A lot of shopping is coming
Based on Tesla’s current market capitalization, estimates suggest that its weight is likely to be 1-1.5% of the S&P 500. Pick up that amount and apply it to the $ 4.6 trillion S&P tracking assets, and you’ll get $ 46 billion in $ 69 billion worth of Tesla stock that index funds have to buy, coming in late December.
That amount is so huge that S&P Dow Jones has looked at the distribution of Tesla’s reception over a few days. No final decision has yet been made on this front, but the disintegration of the move could make it easier for forced buyers to find willing sellers.
Is there a short squeeze coming?
The other thing to keep in mind is that Tesla already accepts many investors against its stock. By the end of October, nearly 48 million Tesla shares had been sold – worth more than $ 25 billion at current prices. This accounted for 5% of the shares outstanding.
If buyers linked to the index eventually push the stock price higher, the resulting squeeze on short sellers could result in an even sharper upward movement. Admittedly, after this year’s high earnings on Tesla shares, anyone who sells shares needs to be prepared for short risk and thus less likely to be pushed out than most short agents. However, only so many short-sale investors are willing to lose. This can also leave the stock open before a major short-term collision.
The holidays will be interesting for Tesla
For many investors, adding Tesla to their index fund portfolio means owning shares in the electric car manufacturer for the first time. They have no choice in this matter.
However, if you think that Tesla’s underlying business is justifying a big rise in the stock price this year, you better not wait for the index funds to buy up. In the short term, a big rise in the stock price makes all the sense in the world.
