If MSCI removes MSTR, will the stock price not fall? Historical backtesting provides an unexpected answer.
The debate over whether Strategy should be removed from the MSCI index has become a Damocles' sword hanging over Strategy's head.
The market seems to be waiting for the official announcement on January 15th next year to put an end to the debate surrounding $MSTR.
How influential is MSCI? If Strategy is removed, will its stock price really drop? I backtested historical data, and the answer was surprising.
In conclusion, even if MSCI removes MSTR, it is highly unlikely that MSTR will experience a significant drop as a result.
I. Why do we care about MSCI?
First, we need to understand why MSCI's decision is so important.
The MSCI index is not simply a list of stocks; it is a benchmark for global asset allocation worth trillions of dollars.
1⃣ Forced buying and selling of passive funds:
Globally, there are trillions of dollars worth of ETFs (such as iShares and Vanguard) and index funds that strictly track the MSCI US Index.
Once MSCI announces the removal of a stock, these funds must unconditionally sell the stock on the effective date (usually at the close of trading at the end of the month), regardless of cost.
2⃣ A double blow to liquidity and public attention:
Being removed from the portfolio typically means a company has been kicked out of the "core assets" club. Many actively managed funds, constrained by risk control rules (such as only being able to invest in major index constituents), are also forced to follow suit and reduce their holdings. This leads to decreased stock liquidity and a downward shift in valuation levels.
II. Historical Echoes: Market Crashes Often Occur Before Announcements
However, based on my backtesting of data from the last MSCI index adjustment, the decline often does not begin on the day of the index adjustment.
The rule of financial markets is that prices always precede news.
The most recent MSCI index adjustment occurred in November of this year, removing companies such as Whirlpool, Sensata, and ZoomInfo.
The timeline for MSCI index adjustments is as follows:
November 5th announcement adjustment
The announcement will take effect on November 25.
Through calculation, I found that the largest drop in the price of the removed stocks did not occur after the removal took effect, but rather during the anticipation phase before the announcement.
The data is shown in the following figure.
Phase One (Panic Incubation Period, 100 days before the announcement):
During this period, the stocks that were ultimately removed from the market fell by an average of 24.5%. The market had anticipated the removal results through deteriorating fundamentals and shrinking market capitalization.
Smart money has already jumped the gun.
Phase Two (Negative Factors Take Effect Period, from Announcement Date to Effective Date):
When MSCI officially announced the removal from the list, the stock prices remained stable, with an average decline of only 0.7%. Even individual stocks like Whirlpool (WHR) saw a 2.1% rebound after the announcement.
Phase Three (Post-Effect Recovery Period):
After the removal took effect, some oversold stocks (such as Sensata) even recorded gains of nearly 10%.
Overall, the average decline before the announcement was 24.5%, and the average decline after the announcement was 0.7%.
Let's return to our main subject, [MSTR].
In October, MSCI announced that it was considering removing MSTR-type stocks from its indexes.
MSTR's stock price has fallen 51% from its October high, far exceeding the decline in BTC during the same period.
Like other companies that were removed from the MSCI index, passive funds were already being snapped up by the market before MSCI's decision.
III. Signals from the Nasdaq 100
When analyzing whether Strategy will actually be removed from MSCI,
We cannot ignore a key leading indicator: the Nasdaq 100 index.
Although the Nasdaq 100 and the MSCI US Index have different compilation rules, their core logic is highly overlapping: both place great emphasis on market capitalization and liquidity.
On Friday, the Nasdaq 100 announced that it would retain Strategy as a component stock.
This means that, at the index compilation level, Strategy's average daily trading volume and free-float market capitalization still meet the stringent standards of the top 100 non-financial technology companies in the United States.
Since Strategy has managed to hold the Nasdaq 100 threshold, it shows that its fundamentals and liquidity have not collapsed to an irreparable degree.
While MSCI has its qualitative industry classification considerations, Strategy remains highly competitive in terms of hard metrics.
in conclusion
MSCI's decision to remove MSTR from its constituent stocks is definitely a major negative factor.
However, negative news is often priced in by the market in advance. Historical backtesting shows that the impact of negative news on stock prices is actually not significant after it has materialized.
The core variable that truly influences the direction of MSTR is still the trend of BTC.
Furthermore, since MSCI's decision to remove MSTR is still only in the discussion stage, if the announcement on January 15th next year retains MSTR's constituent stock status, that would be a major positive. Retention would lead to a significant increase! Removal would result in a slight decrease. I believe MSTR offers opportunities for asymmetric returns in the near future.
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