Tesla’s Rally Isn’t Stopping — Here’s Why
Dear Tech Profits Daily Reader,
As we head into the Thanksgiving holiday, there’s one group who has a lot to be thankful for in 2020…
Tesla Inc. (NASDAQ: TSLA) shareholders.
Tesla, after all, is having quite a year.
Since the calendar flipped to January, Tesla has seen its stock price surge more than 563%. That’s an astounding feat for a mega-cap stock everybody knows about.
And even more astounding, the Tesla rally probably isn’t stopping anytime soon — it can’t.
Tesla’s in uncharted territory right now. Last week, the S&P committee announced that Tesla would join its giant peers in the S&P 500 Index. Despite being the eighth-largest U.S. company by market capitalization, Tesla hasn’t been part of the S&P 500.
And it’s still not — Tesla officially gets added to the big index on Dec. 21, just in time to fill Elon Musk’s stocking.
You see, Tesla’s S&P 500 inclusion is such a big deal because of its size. The S&P is a market cap-weighted index. Companies with bigger market values make up a bigger share of the index.
No other company in history made up such a large chunk of the index when it was added than Tesla will.
And that matters a lot given the trillions of dollars in index funds that track the S&P 500 — and will suddenly be mandated to own a bunch of Tesla stock this time next month.
Lots of folks have been trying to guess when the Tesla surge will cool off. My guess is it won’t — at least not in the immediate term. There’s about $50 billion in forced buying from the Tesla S&P 500 inclusion. And another $6.6 trillion in assets that track the S&P more loosely and will probably need Tesla exposure if they haven’t already picked it up.
Tesla has been posting consistent gains every day since the S&P news was announced. My guess is that’s being driven by traders at big institutions trying to get their TSLA positions on the books without sending the stock stratospheric.
Fundamentally, Tesla’s stock price is crazy. At the same time, it’s probably going to keep getting crazier before it cools off.
A few weeks ago, I told you that in a crazy market, it makes sense to trade crazy. Tesla’s a great example of that.
At the same time, the thing that’s actually driving Tesla’s crazy price tag — S&P 500 inclusion and forced institutional buying — is very rational.
That’s true of the broader market right now. The higher ground we’re seeing in stocks may seem hard to reconcile with the economic situation we’re in as a result of the COVID-19 pandemic. But when you look at the Fed moves actually driving stocks up and to the right, it makes a lot of sense.
Bottom line: Look for tech to continue to lead the market higher.
Jonas Elmerraji, CMT