intro – s&p 500:
The S&P 500 index, also referred to as simply S&P or SnP, is a stock index that measures the performance of 500 large companies listed on US stock exchanges. It is maintained by S&P Dow Jones Indices LLC, a joint venture between S&P Global, the CME Group and News Corp.
S&P 500 is the most popularly used index in US as it is a better gauge of US economic activity than Dow Jones. This is because most of the Dow Jones companies are global behemoths like Google, Microsoft, Apple, Nike, Cisco, Visa, Boeing etc. Their performance is linked to the global world economic activity and not just the US.
a detour back in time
S&P 500, in it’s current form came into existence in 1957 and was called S&P 500 Stock Composite Index. However, it’s earliest origins date back to 1923 when Standard Statistics Company began publishing ratings for mortgage bonds. During this time, they also started to publish their first stock market index, calculated weekly, that consisted of 233 US companies. In 1926, they started publishing a 90 stock index that was recalculated daily. Following merger of Standard Statistics Company with Poor’s Publishing, Standard and Poor’s was formed in 1941.
S&P 500 had it’s biggest daily loss on Black Monday, in Oct-1987 when the index fell more than 20%. During the 08-09 financial crisis, S&P 500 fell almost 60% between Oct-2007 and Mar-2009. S&P 500, then climbed it’s way back more than 400% by Mar-2013.
back to today
The purpose of S&P 500 index is to measure the health of the country’s economy. Because(in theory) positive or negative outcome of a single company or sector does not impact the index as a whole. Instead, it offers a generalisation over the top companies that adopt the highest levels of corporate governance standards.
Inspite of the fact that, S&P 500 is not a financial asset in and of itself, there is now a very large market for derivatives, futures, Mutual Funds and ETF’s to speculate on it’s performance. For instance S&P mini’s that allows a smaller contract size to be traded than standard S&P futures is almost a household name
These products either reference or try to replicate the performance of S&P. For instance, a mutual fund may hold the shares of companies in the exact(or close to exact) proportion as the S&P 500. Consequently, the fund managers rebalance the fund as and when there are changes in the index’s composition.
S&P 500 is capitalisation weighted average index and is recalculated and published every 15 seconds by Reuters. S&P Global index committee is responsible for rebalancing the index quarterly. This committee decides on the constituents, to ensure the companies are relevant and representative of the broad US economy. Some of the key considerations are liquidity based size requirements, total market capitalisation, annual dollar value traded to float-adjusted market capitalisation and minimum monthly trading volume in each month during the six months leading up to the rebalancing date.
variables and factors that impact S&P 500
dollar(USD) rate in fx markets
Firstly, as USD appreciates in value, this causes a drop in foreign investment, since foreign investors get less USD for their currency. Hence, large global investors will not use their USD reserves to buy US stocks. On the other hand, depreciation of USD will make S&P 500 stocks cheaper. Hence, the index will rise in this scenario.
Secondly, higher inflation means depreciation in the value of USD and that the US companies are able to sell their goods and services at higher prices. Therefore, the index will rise in the short term as companies are bringing in more cash. However, this will then, translate to higher employee wages and higher cost of goods and raw materials. Hence, high inflation over a sustained period of time, will cause S&P 500 to drop in the long term.
Thirdly, short and medium term interest rates spike will impact the stock index. This is because higher rates will mean a (relatively)risk free alternative to stocks – a more risky asset. However, longer term high rates will lower bond yields and therefore, the large investors’ money will move to stocks, causing S&P to spike.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact S&P 500. For instance, high unemployment rate will imply drop in consumer demand and this would cause a downward trend for stocks. In contrast, a higher PMI in the US will mean an increase in economic activity, leading to higher employment and a high demand for goods and services produced by US companies.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily prediction algorithm results. These algos use all factors that impact S&P 500 price and evolve over 10 days in the future. Tutorial and brief user guide is available here – Tutorial.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.