What happened
Shares of Cerence (CRNC -6.57%) were up by more than 13% as of 12:45 p.m. EDT Friday after the artificial intelligence solutions provider for automobiles announced it was being added to the S&P MidCap 400 Index (^MID). The change will become effective at the start of trading on July 7.
So what
When a company gets added to a notable index, its shares typically head higher because the mutual funds and exchange-traded funds based on that index will be required to buy the stock to continue matching it, and also because such events make the company more visible to retail investors.
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Cerence, which builds custom voice software for carmakers such as Ford (F 0.69%) and General Motors (GM 1.20%), also has a relatively high level of shares sold short, which would have added to the upward pressure on the stock once it began rising.
More than 12% of Cerence's outstanding shares are shorted. Based on the stock's average daily trading volume, it would take more than 10 days for all those short-sellers to be able to buy back the shares they require to cover their positions. A "days to cover" ratio above 7 is considered high.
Now what
The addition of Cerence's stock to the MidCap 400 index doesn't affect its day-to-day operations, nor will a short squeeze caused by a mass exodus of short-sellers from their positions.
Those factors might introduce more volatility into the stock price, at least for the immediate future, but if you're a long-term investor in Cerence who remains confident in its long-term outlook, feel free to ignore these developments as background noise.
