Lululemon Athletica’s (LULU:US) stock saw a 6.6% increase in early Monday trading after the S&P 500 Dow Jones Indices announced that the company would replace Activision Blizzard (ATVI:US) on the S&P 500.
This change is set to take effect before the opening of trading on October 18th, as per the statement from S&P Dow Jones Indices.
Stocks often rise when they are included in major stock market indices like the S&P 500 for several reasons, including increased visibility, higher investor confidence, stronger liquidity and trading volume, etc.
Moreover, many institutional investors, including pension funds and other large asset managers, use index components as part of their investment strategies.
When a stock is added to a major index, these institutions may need to adjust their portfolios accordingly, leading to increased buying.
News of inclusion in a major index, like in the case of Lululemon, is often associated with positive sentiment, as it signifies that the company meets certain criteria and is considered a significant player in the market.
Inclusion in a widely followed index like the S&P 500 increases the visibility and awareness of the stock among investors. Many passive funds, such as index-tracking ETFs and mutual funds, will need to purchase shares of the newly added company to replicate the index, which can lead to increased demand.