A change has occurred in the market because of the ability to trade the S&P 500 index directly rather than individual stocks. S&P futures have become an active vehicle for both speculation and hedging. If you think that stock prices are about to fall because of a pending interest rate announcement by the Fed, you can protect your portfolio by selling an equivalent amount of S&P futures. Afterward, when you have decided that prices have stabilized, you can lift your hedge and profit from rising prices. It’s an easy and inexpensive way to achieve portfolio insurance.
When institutions and traders buy or sell large quantities of the S&P futures, that price can drop while the share prices of the stocks that comprise the S&P Index may not have fallen yet. Enter the big business of program trading. If you have enough capital and the difference between the S&P futures price and the S&P cash index is sufficiently large, you can buy the S&P futures and sell all of the stocks in the S&P 500 cash index. It is a classic arbitrage that brings prices back together.
How does program trading, or just the trading of S&P futures, affect the price patterns of individual stocks? The answer is that all the stocks in the S&P Index move together at the same time. It doesn’t matter whether IBM is fundamentally stronger the GE, or that Xerox is at a resistance level and Ford is at support, or even if Enron is under investigation. When you buy the the S&P you buy all of the stocks at the same time.
Today’s technical trader must keep one eye on the individual stock and the other eye on the index. Exxon may have moved above its recent resistance level but stops because the S&P Index is at its own resistance level, and there are more traders watching the S&P than Exxon. In today’s market, you can anticipate when a stock will find support and resistance by looking at the S&P chart rather than at the stock chart.
During times where there is no news, the stocks all move together. When there is positive news for a specific company, it will gain over other stocks, but it will still meet resistance where the S&P as a whole meets resistance. This change in the way stocks are traded reduces the ability to get diversification by trading across sectors and increases your risk. Short-term traders will not be as affected as those holding positions longer.
When institutions and traders buy or sell large quantities of the S&P futures, that price can drop while the share prices of the stocks that comprise the S&P Index may not have fallen yet. Enter the big business of program trading. If you have enough capital and the difference between the S&P futures price and the S&P cash index is sufficiently large, you can buy the S&P futures and sell all of the stocks in the S&P 500 cash index. It is a classic arbitrage that brings prices back together.
How does program trading, or just the trading of S&P futures, affect the price patterns of individual stocks? The answer is that all the stocks in the S&P Index move together at the same time. It doesn’t matter whether IBM is fundamentally stronger the GE, or that Xerox is at a resistance level and Ford is at support, or even if Enron is under investigation. When you buy the the S&P you buy all of the stocks at the same time.
Today’s technical trader must keep one eye on the individual stock and the other eye on the index. Exxon may have moved above its recent resistance level but stops because the S&P Index is at its own resistance level, and there are more traders watching the S&P than Exxon. In today’s market, you can anticipate when a stock will find support and resistance by looking at the S&P chart rather than at the stock chart.
During times where there is no news, the stocks all move together. When there is positive news for a specific company, it will gain over other stocks, but it will still meet resistance where the S&P as a whole meets resistance. This change in the way stocks are traded reduces the ability to get diversification by trading across sectors and increases your risk. Short-term traders will not be as affected as those holding positions longer.
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