By Chibuike Oguh
NEW YORK, April 24 (Reuters) - White-knuckle trading this month in car rental firm Avis Budget has taken one of the longest-standing U.S. stock indexes for its own thrill ride.
Avis shares plunged 70% over Wednesday and Thursday, their biggest-ever two-day decline, after they more than quadrupled in the latest sign of investor exuberance for meme stocks that take on lives of their own. These moves often take place in firms that are not perceived to have exciting prospects and are the subject
of bets that their shares will decline.
"Avis is a mature company - it's not in the AI business, it's not going to cure cancer," said Matthew Maley, chief market strategist at Miller Tabak. "So it's just chasing a short squeeze and it's kind of ridiculous. It shows there's money sloshing around the system looking for places to go."
DOW TRANSPORTATION AVERAGE'S WILD RIDE
Among those dragged along with Avis was the Dow Jones Transportation Average, often viewed as a barometer for the U.S. economy's health. The transport index, launched in 1896, rose as much as 33% before pulling back with Avis' return to earth, including its largest single-day decline since March 2020.
The Avis episode -- in which a firm currently valued at $8 billion moved an index featuring firms such as Uber, United Parcel Service, Norfolk Southern and Delta Air Lines that are worth tens of billions more -- is the latest study in the limitations of price-weighted indexes, investors said.
Price-weighted indexes are calculated by summing component share prices, rather than the market values used by the more widely employed market-value-weighted indexes such as the S&P 500. A small company can wag the tail of a benchmark, said James St. Aubin, chief investment officer at Ocean Park Asset Management.
"If you look at Avis, it highlights the sorts of issues with weighting schemes," St. Aubin said. "On a market capitalization basis, I think it constitutes maybe 1% of the index. But if you look at the price index, it's closer to 20% because the share prices are higher."
The S&P Transportation Select Industry FMC Capped Index - a market-capitalization-weighted gauge tracking the same sector - posted muted swings. The index rose 1.8% on Thursday after dropping 2.4% on Wednesday. A spokesperson for S&P Global, which owns and maintains both the Dow Jones and S&P indexes, declined to comment.
SQUEEZE MECHANICS
The proximate cause of the action in Avis Budget's shares was a short squeeze, in which investors buying a heavily shorted stock push the price up, forcing bearish investors to cover their short positions at rising prices. In short sales, investors borrow shares and sell them, expecting to buy them back at lower prices later and pocket the difference.
Two hedge funds, SRS Investment Management and Pentwater Capital Management, together own about 70% of Avis Budget's outstanding shares, according to LSEG data. Pentwater Capital recently increased its stake, shrinking the available float. Retail traders piled into it, adding meme-stock momentum and driving short sellers into billions of dollars worth of losses in April, according to data analytics firm Ortex.
The Roundhill Meme Stock ETF — an actively managed fund that targets stocks driven by social media momentum rather than fundamentals — listed Avis Budget as its single largest holding at a weighting of 6.44%.
The sharp swings have left analysts questioning whether the Dow transport index conveys meaningful insight into the sector or the broader U.S. economy - particularly given the spike in oil prices caused by the Middle East conflict.
No exchange-traded fund tracks the Dow transport index, while the S&P's transport index underlies several funds, including the $1.8 billion iShares Transportation Average ETF, St. Aubin said. "I think most investors aren't looking to invest based on a price per share weighting scheme," he said.
The Dow transport index is rooted in Dow Theory - a century-old framework holding that sustained moves in transportation stocks and the Dow Industrial Average can confirm or deny trends in industrial activity. But some say the theory has outlived its usefulness.
"I don't really think the Dow Theory is that operative, so I would just say God bless you if you follow it," said Jay Hatfield, chief executive and chief investment officer at Infrastructure Capital Advisors. "I think it's anachronistic."
(Reporting by Chibuike Oguh in New York, additional reporting by Chuck Mikolajczak; editing by Colin Barr and Rod Nickel)
