WASHINGTON – With pre-Christmas chores intervening, we missed posting a column Friday. But no matter. The malaise we saw in Friday markets, due as much to quadruple witching nonsense as much as with the impending addition of Tesla (NASDAQ: TSLA) to the S&P 500 kept market averages in the wobbly-to-down zone. Today, Monday, it’s more of the same. This time, Tesla S&P 500 chaos continues to attract and repel investors. But Friday’s quadruple-witching madness was replaced Monday by a new WuFlu terror attack. Namely, the late-breaking UK coronavirus scare.
About that UK coronavirus scare
To wit, without much evidence (to my way of thinking), the UK has announced that scientists are finding a new coronavirus strain that spreads much faster (apparently) than the normal WuFlu version. Mass shutdown orders and threats are ensuing, and the Eurozone is in the process of banning all flights to and from the UK.
As a consequence, airline stocks are getting hammered again Monday by this new UK coronavirus scare. In related moves, oil and gas companies are getting hit as well. Although to a lesser extent. Is this never-ending WuFlu panic part of a novel resurrection of the Cloward-Piven scheme to drive everyone except the rich dudes into poverty. Because Davos “reset”? Who knows? But conspiracy theories real and fanciful aside, all these coronavirus terror rumors have about run their course among the general public worldwide. Look for real international chaos around the world as we turn the calendar to 2021.
More on that Tesla S&P 500 chaos, as ETFs are massively rebalanced
Wall Street is feeling the impending UK coronavirus impact as well. But today, at least, with the official inclusion of Tesla shares in the S&P 500, various stock ETFs based on that average find themselves in the midst of readjusting positions to square up with that average’s new reality. In so doing, Friday’s massive buys and sells likely continue Monday. Fortunately, this should settle down as the day progresses.
ZeroHedge had some sensible observations on the Tesla S&P 500 chaos in a highly informative Friday column. It describes the pin action in other stocks in a very understandable way.
“Tesla’s inclusion into the S&P index may not be all sunshine and rainbows for the other companies already in the index. Tesla’s enormous size – coming in at a valuation of $600 billion – will make it the sixth largest market cap in the index and the largest entrant by market value in history.
“Since it is replacing a much smaller company in ‘Apartment Investment and Management Co.’, the carmaker’s addition could wind up setting up serious volatility for other index components. In fact, Citadel’s head of trading, Greg Sutton, says that even though SPY funds will have to buy more than $70 billion worth of Tesla shares, they’re also going to have to ‘dump an equal amount of stock in existing members’ of the index.
“These stocks may have troubling managing what Bloomberg is calling a ‘sudden deluge of supply’. “
S&P 500 chaos, continued…
“This deluge, he told Bloomberg, could cause ‘intense selling pressure that could lead to dislocations’. It was these types of dislocations that had prompted the index to consider adding Tesla in two shots instead of one – an idea the index has passed on in favor of adding Tesla in one shot. The potential companies that could feel the aftershock of the addition include names like Procter & Gamble, Berkshire Hathaway and Johnson & Johnson. Bloomberg notes:
“The trio is estimated to each have a number of shares to be disposed that is equal to the average daily trading volume in the past three months. While that may not sound like a lot, imagine if the selling flares up in the final minutes of Friday’s session, the last window of trading before Tesla’s entry. That’s the time when passive investors tend to step up transactions so as to track the benchmark as close as possible.
“Sutton commented that this is going to cause more selling in other S&P components: ‘Adding it all at once creates more stock that needs to be sold for the funding trade, which potentially creates more impact — especially in less-liquid components of the S&P 500. The market can digest it, but there is the potential for liquidity impact.’”
That sums it up pretty nicely. In short, ETFs based on the S&P 500 or its many subcomponents have had to input huge sell orders of other largely unrelated stocks in that index to accommodate the massive capitalization – overly massive in my opinion, due to the over-valuation of TSLA.
Moving beyond Tesla, looks like Congress finally passed a new coronavirus relief package
Without relation to the intrinsic value of these other companies’ shares, the massive accommodative selling irrationally hits these big companies. This throws a hitch into recent market action. It obscures what still looks like some kind of Santa Claus Rally. Perhaps it will resume soon. Or not.
On the other hand, it looks, as of this writing, that Congress has actually passed the stimulus bill. The one Pelosi deliberately delayed to aid in the (alleged) November defeat of President Trump. The hell with relief for the peons and destroyed bars and restaurants. #NeverTrump. #Resist.
What happens when the extreme anger in the pro-Trump camp takes over these hashtags in 2021? But that’s for another column. But if this sort of thing becomes a phenomenon, Mr Market will experience heavy going in the New Year.
Markets remain wobbly as I’m wrapping this article up, just after 1 p.m. ET. The Dow is actually slightly in the green zone at the moment, with the S&P 500 (including Tesla) and the NASDAQ are only marginally down. All this after a lousy 9:30 a.m. opening trade. But who knows where things will go before the 4 p.m. closing bell.
These are indeed tough times for traditional investors like this writer. We’re all working without a net these days.
– Headline image: Cartoon by Branco. Reproduced with permission and by arrangement with Legal Insurrection.
Resized to fit CDN format.