The S&P 500 Just Bought High… And Sold Low
What Every Investor Should Learn from the S&P 500 Rebalance
There’s a comfortable old belief in markets: when a stock gets added to the S&P 500, it pops — because every index fund on earth is forced to buy it. When a stock gets removed, it sinks, because they’re all forced to sell.
For years, traders tried to front-run that.
A look at the notable additions and removals from 2023–2025 says that trade is mostly dead — and that the real lesson is far more useful. The index isn’t a quality stamp. It’s a backward-looking, size-based machine that systematically buys what already went up and sells what already went down.
The pattern hiding in plain sight
Look at what a stock had already done before the index touched it. Super Micro had run roughly 310% over the prior six months when it was added. Robinhood, about +182%. AppLovin, +105%. Even the more measured additions — Palo Alto, Palantir — had already climbed 50–60%. As a group, additions arrive after a big move: typically +20% to +85% in the six months prior, and sometimes far more.
Now look at the other door. SolarEdge was down about 66% before it was removed. American Airlines, down 26%. Etsy, down 19%. Removals arrive after a long decline — often −20% to −60% in the prior six months. The market caps tell the same story: companies being added are giants (AppLovin north of $200B, Uber $127B, Robinhood $111B), while the ones being shown the door are small ($5–10B). By rule, you only join once you’ve grown into the size threshold, and you only leave once you’ve shrunk out of it. The index is structurally late at both ends.
Lesson 1: the “inclusion pop” is gone
The forced-buying bump has been arbitraged away. Across these names, the average return in the first month after being added was slightly negative. Palo Alto went flat, Super Micro fell 7%, CrowdStrike dropped 32%. The smart money front-runs the effective date, and the “news” is sold by the time the index funds actually buy. If your edge is “they have to buy it,” you no longer have an edge.
Lesson 2: mean reversion rules — but it’s selective
This is where it gets useful. After the event, the dominant force is mean reversion — but how a stock got there decides everything.
Parabolic additions revert hard. Super Micro was added after a +310% moonshot, then gave back 56% and 62% over the next 6 and 12 months. Robinhood (−43%) and AppLovin (−31%) followed the same script. When a vertical chart gets waved into the index, that’s often the top of the enthusiasm, not the start.
Durable trends keep working. Palantir was added after a strong — but not parabolic — run, and went on to gain 113%, 140%, and 381%. Palo Alto, CrowdStrike, and Interactive Brokers also kept climbing. The difference is real, secular growth versus a blow-off.
Washed-out removals can bounce. American Airlines, kicked out near its lows, rallied 57% over the next three months. Etsy was down at removal and finished +14% a year later. Forced index selling can manufacture a capitulation low — if the business isn’t broken.
But beware the falling knife. SolarEdge was removed down 66%… and kept falling to −85%. “It’s cheap because it’s out of the index” is not a thesis.
Lesson 3: not all exits are equal
There’s a critical fork on the way out. M&A-driven removals (think Walgreens going private) behave nothing like market-cap exits. An acquired company already reflects a takeover premium when it leaves — there’s no bargain left to buy. A market-cap exit reflects sustained operational deterioration — which can keep deteriorating. Same red “Removed” label, completely different setups. Always ask why a name is leaving before you assume anything.
And the AI-thematic outliers deserve their own caveat: names like Palantir rode a secular multiple re-rating, not index mechanics. Don’t assume those simply revert — but don’t assume the parabola (Super Micro) keeps going, either. The chart tells you what already happened; it doesn’t tell you which camp you’re in.
How we’d actually use this at GYP
We don’t trade the label — we trade the setup, and we let volatility do the work:
A freshly-added, parabolic name is carrying rich implied volatility and elevated reversal risk. That’s a dangerous chart to chase long, but it can be fertile ground for defined-risk premium selling or call-ratio structures that get paid for the over-excitement — never naked, always sized small.
A washed-out removal near capitulation can be a candidate for cash-secured puts or the wheel — but only on a name you’d genuinely be happy to own, and never on a falling knife like SolarEdge. Let the forced-selling create your entry; let the premium pay you to wait.
The macro takeaway: index membership is a backward-looking, size-based label — not a quality signal and not a trade. Price, trend, valuation, and implied volatility tell you what to do next.
The headline writes itself: the S&P 500 buys high and sells low, on a schedule, for structural reasons. The investor who understands that doesn’t chase the announcement — they position for what tends to happen after it.
Want to see how we turn reads like this into actual, defined-risk positions? Every trade, hedge, and roll across all three portfolios is live, in real money, on the member dashboard at growyourpile.com.
Educational content from the Grow Your Pile team. Not investment advice or a recommendation to buy or sell any security. Options involve substantial risk and are not suitable for all investors. Past performance is not indicative of future results. Figures are point-in-time and will change. (Data: notable S&P 500 additions & removals, 2023–2025.)
— Tony Battista & Tony Rihan Grow Your Pile