Here’s what is pushing Tesla stock towards $ 600 – and beyond

You’re here (NASDAQ: TSLA) has been one of the biggest stock market stories of 2020. With stocks posting gains of nearly 550% just since Jan. 1, those who believed in the business model CEO Elon Musk built have benefited greatly. Musk himself was one of the biggest winners in Tesla stock, rising to third place among the richest people in the world, according to Forbes.

In the long run, stock movements reflect the success or failure of a company’s underlying activities. Short-term stock price fluctuations are much more difficult to assess. Nonetheless, there is a good reason Tesla’s stock appears to be heading towards $ 600 per share for the very near future. It could go much higher if the conditions are right.

It’s a question of supply and demand

Tesla has a lot of metrics that investors watch from quarter to quarter. The delivery figures are probably the most important, they usually come out in the first days of each new quarter. Profit reports also carry considerable weight.

With all of these catalysts behind us for the current quarter, the number of fundamental news affecting Tesla by the end of the year is likely to be low. This makes the share price more sensitive to factors that do not involve Tesla’s sales strength.

Specifically, the main driver of Tesla stock by the end of the year is likely to be the decision by the S&P Dow Jones indices to add Tesla to the S&P 500 index. The case of the bull is quite simple:

• Current shareholders know that index funds replicating the S&P 500 will have to purchase Tesla shares in substantial amounts by December 21.
• Knowing that this whole buying is on the horizon, there is little reason for these shareholders to sell now.

The sheer amount of money following the S&P 500 is incredible. S&P Dow Jones Indices report that $ 11.2 trillion in assets use the S&P 500 as a benchmark for performance comparison purposes. Of that amount, more than 40% – $ 4.6 trillion – is index-linked assets directly linked to components of the S&P 500.

Many purchases are to come

Based on Tesla’s current market cap, estimates suggest it will likely have a weight of between 1% and 1.5% of the S&P 500. Take that amount and apply it to the $ 4.6 trillion of S&P tracking assets, and you get $ 46 billion to $ 69 billion of Tesla shares that index funds will have to buy in late December.

This amount is so huge that S&P Dow Jones considered spreading Tesla’s inclusion over a few days. No final decisions have been made on this front, but stopping the movement could make it easier for these forced buyers to find willing sellers.

Does a little pressure come in?

The other thing to keep in mind is that Tesla already has a lot of investors betting against its stocks. At the end of October, nearly 48 million Tesla shares – worth more than $ 25 billion at current prices – were sold short. This represented 5% of the outstanding shares.

If the index-linked buyers end up pushing the stock price higher, the resulting pressure on short sellers could lead to an even steeper rise. Granted, after the big gains in Tesla shares this year, anyone who sells stocks short should be prepared for huge risk, and therefore they are less likely to be ousted than most short sellers. However, investors who sell short are not ready to lose. It could also leave the stock open for a big bump in the short term.

Holidays will be interesting for Tesla

For many investors, the addition of Tesla to their holdings of index funds will be the first time they will own shares of electric carmakers. They have no choice in the matter.

However, if you think Tesla’s underlying business justifies the sharp rise in its share price this year, you might prefer not to wait for index funds to buy. In the short term, a sharp rise in the share price would make sense around the world.