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What to expect at the market close today ahead of Tesla's S&P 500 inclusion

Yahoo Finance’s Julie Hyman, Myles Udland, and Brian Sozzi discuss what Tesla’s S&P 500 inclusion means for Wall Street with S&P Global Senior Index Analyst, Howard Silverblatt.

Video Transcript

MYLES UDLAND: Big events happening in markets over the next couple of days, and especially as it relates to index composition, not often the hottest topic in the market, but with Tesla set to join the S&P after the close today, certainly something investors are keeping a very close eye on. For more on this conversation, we're joined now by Howard Silverblatt. He is a senior index analyst over at S&P Global.

Howard, it is great to talk with you this morning. And I'd love to begin by just having you put in context for us the unprecedented nature of Tesla's inclusion given the size of the company and how large a weight it's going to have in the S&P when it does join.

HOWARD SILVERBLATT: The price will be determined tonight, obviously, but at this point in time, Tesla will be the largest issue we've ever put into the index. It will be the seventh largest, 1.57%, just below Alphabet, ahead of Berkshire Hathaway, and it will require, again, we'll have to see how the actual trades go down, but about $85.2 billion in trading just for Tesla alone.

And the major item here is that in order to buy something for $85 billion, you need to sell something for $85 billion. So the rest of the index, the members will come under some pressure on selling as funds attempt to liquidate the other issues and pick up Tesla. The big action is expected to be near the end of the day, because that's the price that the index uses, its closing price. So everyone wants to get in right at the close there which will make a lot of commotion.

JULIE HYMAN: Speaking of commotion, Howard, it's Julie here. It's good to see you. We also have, as we noted on that graphic, quadruple witching happening today, which is the expiration of futures and options contracts. That also tends to cause a lot of volatility, particularly at the open and at the close, and an up tick in volume. So when you combine that with the Tesla effect, what can we expect?

HOWARD SILVERBLATT: Even more volatility, yes. The liquidity obviously will be high. There'll be a lot of action taken outside of the S&P 500 for the options and futures, as you noted. With our rebalancing, which we also do on this day to put our pieces in there, indexes will have to generate at least $100 billion in additional trading.

So again, it will be very hectic. However, with regards to the buying and selling for the index, the funds and money managers have had this information for almost a month. And they had planned it out, their side, exactly how they want to do their trades, and at what point. On the other side, the people who have purchased, say, Tesla, as a short term investment, hoping to sell into that, have also planned it out.

So you're going to have a bit of a battle with the objective against each other right at the end of the close today. So it's going to be hectic. As individuals want to get in there, they should be advised that the other players are very quick, they've got it planned out, and your risk reward is a lot steeper than it was before.

BRIAN SOZZI: Howard, do you think we'll see a good deal of selling in those smaller cap companies in the S&P 500 because of the inclusion?

HOWARD SILVERBLATT: Yes. Again, they have to get this $85 billion from somewhere. We're not as concerned about the higher end, and they do it in proportion, of course, so they're going to be selling Apple a lot more than a small company. Some of the lower volatility stocks are of concern, and that's why we've looked at the situation as this-- you could have some kind of ordering balance shortly near the end of the market. Again, it usually self-alleviates by Monday on the opening. But yes, that is a concern, the issues that do not trade that much and all of a sudden have some selling without the buyers, and they have to support it.

MYLES UDLAND: All right, Howard Silverblatt, Senior Index Analyst over at S&P Global. Howard, great to get your thoughts this morning on this very exciting day for S&P 500 composition. Have a great holiday, and we'll talk next year.

HOWARD SILVERBLATT: Thank you.