Tesla (NASDAQ: TSLA) is one of the biggest stock stories in 2020. With the shares, the sports profit of almost 550% from January 1, those who believed in the business model built by CEO Elon Musk, made quite a profit. Musk himself is among the biggest winners of Tesla shares, jumping to third place among the richest people in the world, according to Forbes.
In the long run, stock movements reflect the success or failure of the company’s core business. Short-term changes in stock prices are much more difficult to assess. However, there is a good reason why Tesla shares seem to be moving up to US $ 600 per share in the very near future. It can go much higher if the conditions are right.
It is a matter of supply and demand
Tesla has a lot of metrics that investors see from quarter to quarter. Delivery figures are probably the most important, usually coming out in the first days of each new quarter. Earnings reports obviously carry considerable weight as well.
With all those catalysts behind us for the current quarter, the amount of fundamental news affecting Tesla from now until the end of the year is likely to be small. That leaves stock prices more vulnerable to factors that do not include Tesla’s business power.
In particular, the biggest driver of Tesla shares from now until the end of the year will probably be the decision of the S&P Dow Jones Indeks to add Tesla to S&P 500 index. The case of the bulls is quite simple:
- Current shareholders know that index funds following the S&P 500 will need to buy significant Tesla shares on or before December 21st.
- Knowing that all that buying is in sight, there is little reason for those shareholders to sell now.
The huge amount of money that follows the S&P 500 is amazing. The S&P Dow Unions Index reports that $ 11.2 trillion in assets use the S&P 500 as a benchmark for benchmarking. Of that amount, more than 40% – $ 4.6 trillion – are indexed assets that are directly linked to S&P 500 components.
The whole purchase is coming
Based on Tesla’s current market capitalization, estimates suggest there will likely be a 1% to 1.5% weighting of the S&P 500. Take that amount and apply it to $ 4.6 trillion in S&P tracking tools. and you will receive $ 46 billion to $ 69 billion of Tesla stock, which the index funds will need to buy, will come in late December.
That amount is so huge that the S&P Dow onesons watched as Tesla’s involvement spread in a matter of days. No final decision has been made on that front, but canceling the move could make it easier for forced buyers to find willing sellers.
Is there a short squeeze?
The other thing to keep in mind is that Tesla already has a lot of investors betting on its shares. By the end of October, nearly 48 million shares of Tesla stock had been briefly sold – worth more than $ 25 billion at current prices. That represented 5% of the unpaid shares.
If index-linked buyers eventually push the stock price higher, the resulting pressure on short-sellers could lead to an even sharper upward movement. However, after the big gains in Tesla shares this year, anyone who sells the stock briefly should be prepared for a huge risk and is therefore less likely to drain than most retailers would. However, there are only so many short selling investors who are willing to lose. This can leave the action open for even a big short-term blow.
The holidays will be interesting for Tesla
For many investors, the addition of Tesla to their index funds will be the first time they have owned shares of electric car makers. They have no choice in this matter.
However, if you think that Tesla’s core business activity justifies the large drop in stock prices this year, then you may not want to wait until the index assets are bought. In the short term, the huge rise in stock prices will make all the sense in the world.