There was a study from Texas A&M that was highly cited in Superstonk last week upon news of GME moving from the S&P SmallCap 600 to the S&P MidCap 400. I myself wrote a summary of the conclusions of this study on what to expect: https://www.reddit.com/r/Superstonk/comments/oswfnz/gme_to_the_sp_midcap_400_on_aug_4th_possible/
I and others who cited this study missed something very important! The problem is that this study (https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.522.7114&rep=rep1&type=pdf) lumps promotions from the S&P 600 to the S&P 400 TOGETHER with promotions of non-indexed stocks straight into the S&P 400. Therefore, this did not give us a clear picture of what specifically to expect for GME moving FROM S&P 600 TO S&P 400.
from Texas A&M study
For GME’s specific type of promotion (from S&P 600 –> S&P 400), we must turn to a separate study (https://cdn.ihsmarkit.com/www/pdf/1020/Index-Inclusion-is-More-Impactful-than-Warren-Buffetts-Berkshire-Hathaway-v3.pdf) which I summarize below.
“larger index” here refers to S&P MidCap 400
Okay, so this is the opposite of what the Texas A&M study was inferring, but also specifically referring to promotion FROM S&P 600 TO S&P 400. What SHOULD we have expected upon the S&P 400 news? A dip! What did we get after the news? A DIP. Nothing out of the ordinary. The average dip is 5.5% from the announcement of this type of promotion (“on date of announcement”); The announcement for GME came AH on 7/27. GME closed at $178.54 on 7/27 and then gapped down on 7/28 and closed at $169.12. A dip of $9.42 or ~5.3%. This is about as close as you can get to exactly what we should have expected! This was predictable, we just missed it.
middle bar is the one of interest here
In fact, it would be so rare to see a price increase when a stock is promoted from S&P 600 –> S&P 400, that out of the ~300 index changes analyzed in this study, NOT A SINGLE ONE showed gains.
Middle bar shows us how normal a dip after promotion to S&P 400 from S&P 600 is! It would be abnormal to see anything else, in fact!
So have the dips AFTER 7/28 also been due to promotion to S&P 400? As this study finds, that is unlikely. The dips since 7/28 have probably been SHFs taking advantage of the downward pressure put on the stock by the promotion to S&P 400 and trying to suppress it for as long as possible (my best guess). In addition, the study found NO TREND on the date of the fund move (TOMORROW for GME), so do not expect any serious price action tomorrow solely due to S&P 400 promotion. Lastly, don’t expect any additional price action (positive or negative) in the next few months that would be attributed to S&P 400 promotion.
Summary (TLDR)
- We (I included) misinterpreted that highly cited Texas A&M study that said we should see positive price action from the promotion to S&P 400.
- Instead, promotion from S&P 600 to S&P 400, specifically, leads to a dip, RELIABLY, based on a more specific study of this type of promotion. Average dip of 5.5% after announcement – GME dip after announcement 5.3%, spot on!
- It is unlikely that any price action after 7/28 has anything to do with S&P 400 and it is more likely SHFs taking advantage of the downward pressure due to the move from S&P 600 –> S&P 400.
- We should not expect any further selling nor buying pressure from GME’s move into the S&P 400, including tomorrow when that move becomes official.
- This changes nothing other than you should find comfort that the dip on 7/28 was likely due to promotion into S&P 400 and subsequent dips may be due to SHFs taking advantage of the initial downward pressure.
- I love this stock and continue to buy, hold, and buy some more.
Not financial advice, you all know that.
edit1: typo, thanks u/guerillasouldier
edit2: A lot have mentioned GXO Logistics (GXO) and Victoria’s Secret (VSCO), both of which are also moving into the S&P 400 and are seeing gains, not dips. Remember, both VSCO and GXO are moving from non-indexed into the S&P 400. This is a completely different index move from what GME is making (S&P 600–> S&P 400). Based on the graphs in the study, this is also to be expected.
edit3: I also did a qualitative volume analysis you can see here: https://www.reddit.com/r/Superstonk/comments/oxing8/sp_midcap_400_promotion_tomorrow_volume/