Index bump gets stumped
- MARA recently added to S&P 600
- Pullback followed one-day rally on news
- Index funds needed to add stock to holdings
When a stock rallies after news that it’s being added to a major index, it isn’t just about positive sentiment. While it certainly raises a company’s profile, the real story is that when a company is added to an index, funds tracking that index need to add the stock to their portfolios.
That’s why some traders look to buy these announcements. But Marathon Digital Holdings (MARA) recently illustrated the risks of buying into the so-called “index bump.” The stock rallied 18% on May 6 after news it would become part of the S&P 600 small cap index as of May 8:
Source: Power E*TRADE (For illustration purposes. Not a recommendation.)
But the stock closed lower four of the next five days, including on May 8—the day it began trading as part of the S&P 600. On May 13, five days after the May 6 rally, MARA was nearly 15% lower, while the S&P 600 had gained 0.8%. Even a trader fortunate enough to buy MARA at the intraday low on May 6 would have been down 5.3% by May 13’s close.
The reality of index additions is that traders don’t know when the announcements will occur, and that a bump, if one occurs, can be a crowded trade.
Market Mover Update: As retail earnings continue to roll in, Walmart (WMT) jumped to an all-time high after releasing its numbers. The post-pandemic environment has been challenging for retailers, and Morgan Stanley & Co. strategists just shared their thoughts on the types of companies that have adapted to the new marketplace realities, and the qualities that have defined stocks delivering shareholder value.1
Copper and copper-mining stocks pulled back on Thursday, one day after the red metal hit an all-time high (see “Metals, miners, and AI”).
Today’s numbers include (all times ET): E-Commerce Retail Sales (10 a.m.), Leading Indicators (10 a.m.).
Today’s earnings include: RBC Bearings (RBC), H World Group (HTHT).
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1 MorganStanley.com. Lessons from Retail Success Stories. 5/14/24.