Skip to main content

Standard & Poor's

announcement that it will increase

JDS Uniphase's


weighting in the

S&P 500

after the close tonight, to account for the optical-component maker's just-finished acquisition of


, has set some traders salivating quicker than Pavlov could ring a bell.

Scroll to Continue

TheStreet Recommends

JDS over a year

And one can readily see why. Changes to the S&P can have a

profound effect on stock prices, because index managers are obliged to buy or sell shares to track the weightings in the S&P. JDS itself demonstrated this when it joined the S&P back in July: The stock rose 27% from the day the addition was announced through the day JDS was added.

Because of the stock's greater weighting in the index,

Merrill Lynch's

derivatives team estimates that index managers will need to buy 22 million shares of JDS at the close. Seem like a lot? It really isn't. It's only about 70% of average daily volume, which is a relative drop in the bucket as far as index reweightings go. "It's a supporting factor, but clearly not the dominant factor" in the trading of JDS stock, says Merrill derivatives strategist Steve Kim.

Midweek Blues
JDS slumps on earnings warning

Kim also notes that people have been talking about how the SDL deal would give JDS a bigger weighting in the S&P ever since JDS joined the S&P. That this change has been so well telegraphed, and that the close of the SDL merger got delayed twice, could well mean that indexers have already amassed all the additional shares they need.

JDSU was down 1.6% Wednesday, despite issuing an

earnings warning last night, probably because there are people hoping for a late bounce on index buying. But if the indexers do already have all the shares they need, a lot of trades may end up going to the dogs.