|
Published: October 9, 2009
The stock market may seem chaotic and
unpredictable -- but there is some order, if you know where to
look.
Some things, history tells us, tend to repeat.
One such instance happens every time the S&P 500 Index drops a
stock with a low market capitalization to add a stock with a
higher one.
The S&P 500 Index is the performance benchmark for U.S.
equities. It’s comprised of 500 large U.S. companies that
represent the many industries and sectors that make up our
economy. Although the makeup of the index is fairly stable,
Standard & Poor's does make changes from time to time. When it
does, investors can make a quick and profitable trade.
The Selling Pressure
Hundreds of funds track the S&P 500. Some are large, like
the Vanguard 500 Index Investor (VFINX), which has more than $45
billion in assets. When Standard and Poor's announces that a
stock is going to be dropped from the S&P 500, each of those
funds must sell the stock, which puts enormous downward pressure
on the stock's price.
In fact, the 11 stocks that got bumped in the past year lost an
average of -15.1% when they were dropped from the S&P 500 Index.
Those losses occurred in just a matter of days -- between the
day Standard and Poor's made the announcement and the day they
were dropped.
The +9.4% Recovery
But there’s a catch -- a profitable one. The losses were only
temporary. Within a week, the 11 stocks had bounced back. The
average gain was +9.4%.
So if you bought each stock the
day it was dropped from the S&P 500
and held it for just one week, you
would be up an average of +9.4%. And
you could have pulled off that trade
not once but 11 times in the past
year.
It seems almost incredible. Could it
really be that simple?
I wondered if these abnormally large
returns were always this good. After
all, 11 isn't a huge sample. So I
went to the source and confirmed
this strategy had been tested with
an even larger sample size -- with
the same profitable results.
Standard and Poor's performed their
own analysis on the price impact of
S&P 500 Index deletions, using data
from 53 deletions between 1998 and
2002. They determined that the
average price gain on a stock was
+10.0% in the ten days following its
deletion from the index -- with most
of that coming in the first six
days.
Who Will Be Next?
Standard and Poor's announces each
change to the S&P 500 in advance,
giving fund managers and investors
ample time to make this trade. But
investors might also want to keep an
eye on the S&P 500 companies with
the lowest market capitalizations.
When a new company is added to the
index, the corresponding deletion
will come from the bottom.
Right now, the stocks with the three
lowest market caps on the S&P 500
are:
The New York Times (NYSE: NYT),
$1.16 billion
Eastman Kodak (NYSE: EK), $1.21
billion
Convergys Corporation (NYSE: CVG),
$1.28 billion
So, keep your eyes open for the next
+9.4% opportunity. I am. -- Amy
Calistri
Editor
StreetAuthority's Stock of the Month |
