Another Take on the S&P Index Effect

Posted August 4th, 2010. Filed under Special Situations

Recently, I’ve written two posts detailing trading strategies for taking advantage of the S&P index effect.

S&P Additions

The first post described a trading strategy for S&P additions. Although it was a profitable strategy over the past few decades, the effect seems to be shrinking.

S&P Deletions

The second part of the series focused on S&P deletions.  The stocks in my sample from the past two years generated outstanding returns, substantially outperforming the broader market.

Trading on deletions is intriguing, since it is very similar to the proven value investing strategy around stock spinoffs.

In summary, indiscriminate selling by index funds provides an opportunity for smart investors to buy stocks selling at a large, but temporary, discount to their true value.

Featured on ZeccoPulse

I was surprised and honored to find my posts featured at Zecco.com. In a post entitled, “The Index Effect: Potential Trading Opportunities?”, Richard Bloch, the Sr. Editor at ZeccoPulse, used my research for a discussion around trading opportunities between S&P indexes.

I thought this was a great quote for summing up why the strategy works:

“If you’re not so fussy about artificial market cap criteria, then it probably doesn’t make much of a difference whether a company’s market cap rank is 498 or 502 – or whether its rank is 897 versus 901 – as long as the fundamentals and technicals still make sense to you.”

Stay tuned for part 3 of the series next week!

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3 Responses so far

  1. Richard Bloch says:

    Thanks for the followup post. Looking forward to seeing part 3 (FYI, it’s “Bloch”, not “Bosch”).

    • asues says:


      Thanks for visiting. As I commented over at Zecco, I really liked the graphic and explanation you used for breaking down the S&P Composite.

      Fixed the typo, my apologies!

  2. Hi Adam,

    Please contact rbarnett@seekingalpha.com at your soonest convenience to discuss the possibility of your joining our family of elite financial bloggers at Seeking Alpha.

    Rebecca Barnett
    Seeking Alpha Editor

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