GOOG and S&P 500 index

**grapes** Fri Mar 24, 2006 2:47 pm

GOOG and S&P 500 index
Yesterday, GOOG was annouced to be added into S&P 500 index and today till now it is stock goes up 7%. Any idea this kind of cases can be reliably exploited?

**springsnailt** Fri Mar 24, 2006 3:14 pm

People have been speculating GOOG being added to sp500 for a while, given its market cap. S&P obviously waited for the recent GOOG downturn to add it, so as to avoid any crash may negatively influence S&P 500 index.

Index funds will be forced to add GOOG. But given that GOOG has already been widely followed, there isn't much speculative value for this event.

**hydralistor** Fri Mar 24, 2006 5:14 pm

I guess grape wants to short or put it?

**blast_investor** Fri Mar 24, 2006 5:37 pm

Typically short term traders are interested in the stocks that are added to SP&500 while value investors are more interested in the stocks that were dumped by SP&500.

Joel Greenblatt book on special situations described the playbook on this. The idea is that blind selling by SP&500 funds on dumped stocks would create value opportunities.

Those kinds of special situations require lots of effort to study the situations. Not every stock dumped by SP&500 is value, not every stock added into SP&500 is over-priced. Homework is needed here.

**springsnailt** Fri Mar 24, 2006 5:53 pm

Here's some research on this issue:

S&P 500 Index Changes and Investor Awareness

HONGHUI CHEN
GREGORY NORONHA
VIJAY SINGAL

Abstract:
We find that, on average, firms added to the S&P 500 index experience a permanent price increase, while those deleted from it suffer only a temporary price decline. Existing theories, such as a downward sloping demand curve, liquidity, and information, fail to explain the asymmetric response. We propose a new explanation for the observed price patterns: changes in investor awareness. Investors become more aware of a stock upon its addition to the S&P 500 index but do not become similarly unaware of a stock following its deletion. This results in a significant price increase after an addition but not an equivalent decline after a deletion. Consistent with our hypothesis, we find that Merton's (1987) measure of awareness improves after an addition but remains essentially unchanged after a deletion. The price reaction is related to changes in the measure of awareness.

From a practical standpoint, our results suggest that index fund managers who are not constrained by tracking error minimization are better off not trading on the effective date. Rather, they may be able to benefit their shareholders by executing purchases of additions upon announcement, but waiting to sell deleted firms until well after the effective date.

**grapes** Fri Mar 24, 2006 7:03 pm

Of course not. But if this is not isolated, why not exploit it by buying it at the day and hold it for 2 days to realize 5% gain. Though you can't get rich quick this way, but you basically saved most transaction costs for a year. Just like the going private play.

Anyone constantly observe the changing or S&P 500 index in recent years?

hydralistor wrote: I guess grape wants to short or put it?

**grapes** Fri Mar 24, 2006 7:06 pm

Blast,

Any other books about special situation you think worth recommending? Or case studies?

blast_investor wrote: Typically short term traders are interested in the stocks that are added to SP&500 while value investors are more interested in the stocks that were dumped by SP&500.

Joel Greenblatt book on special situations described the playbook on this. The idea is that blind selling by SP&500 funds on dumped stocks would create value opportunities.

Those kinds of special situations require lots of effort to study the situations. Not every stock dumped by SP&500 is value, not every stock added into SP&500 is over-priced. Homework is needed here.

**hydralistor** Sat Mar 25, 2006 12:55 pm

I think Goog at ths level is not good for long.
growth is certainly slowing down.

**nodoodahs** Thu Apr 06, 2006 12:42 pm

Links to papers on the index effect
http://nodoodahs.com/investing-strategies/what-is-the-index-effect/