The three trading days of this week brought some dramatic price action in financial markets. What started as a bearish week, ended with the Dow Jones making a new all-time high yesterday after bouncing from the daily lows every single day of the week.
Not all markets benefited from the bid in the Dow and other indices. The cryptocurrency market was slammed by Janet Yellen, calling Bitcoin a bubble, and Bitcoin tumbled over 20% in less than two days. Since the $46k lows, it recovered some lost ground, but not enough to threaten the highs.
On its move lower, Bitcoin made some casualties. Companies that invested in Bitcoin part of their treasury reserves or even more, have suffered as their shares were sold on the exchanges. One of the companies, Tesla, deserves special attention. Tesla is popular on any Forex account because nowadays Forex brokers offer Contracts for Difference (CFDs) on various assets and on individual shares too.
Tesla Hit by the S&P 500 Curse
It is said that any company that is introduced in the venerable S&P 500 index is overbought and, subsequently, will underperform in the period that followed. Tesla was introduced in the index in December 2020, in the second half of the month, right before the winter holidays.
It is also said that the companies that exit the index to make room for the newcomers often outperform the new entrants in a twelve-month period. Only two months have left since Tesla entered the S&P 500, replacing a company named AIV – Apartment Investment and Management, but it already underperforms.
To better understand the phenomenon, it is useful to look at why an index adds new companies. One of the reasons is to make room for new industries or to rebalance the exposure to different sectors. For example, the S&P 500 wanted to add more weight to its tech sector, and so it eliminated some names in the energy sector and other sectors that were overweight.
Tesla announced that it invested $1.5 billion in Bitcoin in January 2021. The news made headlines around the world – an electric vehicle manufacturer gambling shareholders money in speculative bets. Coincidence or not, Tesla’s share price reached a top after the announcement and lost almost a third of its value before bouncing.
It did bounce, as Bitcoin did. However, if it depends on the price of Bitcoin, investors are in for a wild ride.